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January 26, 2005

The Planned End of Social Security as We Know It

Few people (and next to no journalists) are clued-in to the fact that the Bush administration's plans for Social Security appear to involve not the privatization of part of Social Security but the eventual effective near-elimination of the entire thing: cutting the ratio of Social Security benefits to workers' wages each decade. The Lowest Deep explains this:

The Lowest Deep: Why is Re-Indexing So Hard to Understand?: CSSS Plan 2 notes on page 120 that "Benefits in the traditional Social Security system would be indexed to price inflation rather than national wage growth beginning in 2009" and in a footnote [what a cliche] that "In practice, the policy would be implemented by multiplying the PIA bend point factors (the bend points would remain indexed to wages) by the ratio of the Consumer Price Index to the Average Wage Index in successive years." [For those willing to take my word on the math, this is equivalent to re-indexing the "bend points" [including the current maximum benefit] to prices rather than wages.]

Why does this difference matter?... [R]e-indexing the "bend points" (which were set in 1979) results in cuts that grow geometrically over time. Each year, each new wave of retirees gets a deeper cut than the year before...

Under CSSS2, for those in my cohort--born in 1960--the average replacement ratio is 34.8%. For my son's cohort--those born in 1990--the CSSS2 replacement rate drops to 24.6%. For my grandchildren--born in 2020--the CSSS2 replacement rate drops to 17.5%. For my greatgrandchildren--born in 2050--the replacement rate drops to 12.3%. And so on.

Without extremely strict controls on the privatized individual-account portfolios, and without extraordinarily strong pressure to minimize administrative fees (in which case why is Fidelity so enthusiastic?), the Bush plan is for the return of elderly poverty--not, you understand, in the sense of lots of old ladies eating cat food, but of lots of old ladies unable to afford their medical copays with a standard of living far below that of the surrounding society.

Every journalist who writes "price indexing" should be writing "making bigger and bigger cuts in benefits as a percentage of wages every generation."

Posted by DeLong at January 26, 2005 11:53 AM