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May 04, 2005

Dean Baker Says Progressive Price Indexing Isn't Very Progressive at All

He writes:

The Regressive Impact of the Progressive Indexation of Social Security Benefits: While this schedule of benefit cuts is supposed to be progressive... middle-income earners would see large and growing benefit cuts (measured against currently scheduled benefits) under this formula:

  • In 2030, a middle wage earner ($36,500 in annual earnings in 2005) would see a benefit cut of 12.2 percent, while a high wage earner ($58,400 in 2005) would see a benefit cut of 13.2 percent;
  • In 2050, a year when the Congressional Budget Office projects that Social Security would still be able to pay full scheduled benefits if no changes are made, middle wage earners would see a cut equal to 21.1 percent of their scheduled benefit, while high wage earners would see a cut equal to 28.3 percent of their scheduled benefit; *By 2080, the benefit cut for middle wage earners and high wage earners will have grown to 40.2 percent and 50.1 percent, respectively. At this point, low earners ($16,400 in 2005) and maximum earners ($90,000 in 2005) will be receiving almost the same benefit, even though a maximum wage earner will have paid more than five times as much money into the Social Security system;
    • Measured relative to retirement income, the benefit cuts implied by progressive indexation are regressive. The projected cut in benefits for a middle wage earner in 2080 is equal to 26.9 percent of their retirement income, while the implied cut for a maximum wage earner would be equal to just 11.9 percent of their retirement income.
  • When coupled with private accounts, the benefit cuts create a situation in which the highest earning workers will owe the Social Security system an amount of money that is larger than their remaining Social Security benefit, if they opt for a private account. President Bush has created no mechanism through which this money can be reclaimed. This creates a situation in which the highest wage earners will be able to place money in a private account without any offsetting cut in benefits. As a result, the implied cut in benefits will fall even more sharply on middle--income workers....

Posted by DeLong at May 4, 2005 12:39 PM