Senator Bob Bennett: Issues

Certifying the Bennett proposal as one to bring solvency to the system, the Office of the Actuary at the Social Security Administration (SSA) said in a letter:

The effect on the actuarial deficit of the provisions affecting benefits alone would be an improvement in the actuarial deficit by 1.64 percent of taxable payroll, or more than enough to eliminate the OASI program actuarial deficit of 1.60 percent of payroll projected under current law...Thus, the program would be expected to be solvent for the foreseeable future under this proposal.

The Sustainable Solvency First for Social Security Act does three things: changes how benefits are calculated through progressive indexing; establishes longevity indexing and accelerates the present law adjusting retirement age from 66 to 67; and protects benefits of disabled workers.

I’m under no illusion that this bill will pass. But the crisis is looming, and eventually the realities will reach a breaking point and Congress must act. So I offer this solution to my colleagues for their consideration and suggestions.

Progressive Indexing
Progressive indexing would not begin until 2012 and would NOT apply to: any current or future retiree born before 1950; and any worker in the future whose Social Security earnings history was in the lowest 30 percent of career earnings for workers becoming eligible to retire in a given year.

Progressive indexing essentially slows the future growth rate of benefits for higher-earning workers. Their initial retirement benefits will grow more in line with price growth, rather than the even-higher rate of increase pegged to wage growth under current law.

Under current law, retirement benefits are calculated under a “wage indexing” formula that will help propel them to levels significantly higher than the payroll tax revenue available to pay for them. The formula uses the average rate of growth of wages within the economy, rather than changes in the cost of living, to adjust (or “index”) the past earnings of a worker that are used to determine the worker’s initial benefit level at retirement. Because average wages generally grow faster than prices over time, the current benefit formula essentially guarantees that future retirement benefit levels will grow faster in “real” dollar value from generation to generation. Under this proposal, the individuals in the lowest 30 percent of all wage earners retiring in a given year would continue to have their past wages, and resulting benefit levels, indexed according to wage growth, while those at the top of the wage distribution would have their past wages indexed for changes in prices. Those falling in between would have their past wages indexed based upon a “progressive blend” of wage and price changes. In short, future benefit levels for workers who earned higher wages over their working career would not rise as much as benefit levels for workers with lower lifetime earnings, but those workers most dependent on Social Security for retirement income would be protected from such changes.

Longevity Indexing and Acceleration of Current Law Normal Retirement Age (NRA)
Longevity indexing recognizes that future retirees will live longer and, accordingly, receive inflation-protected levels of their initial retirement benefits for longer periods of time than prior retirees. Absent any adjustment for changes in life expectancy beyond the age of retirement, longer lifetimes in retirement would mean increasingly greater dollar amounts of lifetime Social Security retirement benefits in future decades.

Under present law, the retirement age is scheduled to increase incrementally to age 67 beginning in 2022 (the NRA gradually increases for workers born in 1960 and later years, by two months each year starting in 2022 until it reaches age 67 in 2027). Under this proposal, the move from age 66 to age 67 would begin in 2012. The NRA would be increased by two months each year until the NRA reached age 67 in 2017. After that date, initial monthly benefits for future retirees would be periodically adjusted by the SSA to account for changes in the expected average lifetimes of future retirees.

Protection of Disabled Workers
This legislation ensures that the progressive indexing and longevity indexing adjustments would not affect those receiving Social Security disability benefits. Upon reaching retirement age, disabled beneficiaries would transition to retired worker status, and at that point, their retirement benefits would be calculated using a blend of the two formulas that would account for the time period they were disabled and when they were engaged in covered employment.

Although the bill introduced today only addresses the solvency issue, the senator may at a later date consider introducing a second bill allowing the creation of “carve-in” personal accounts and revising existing pension laws to encourage higher levels of personal retirement savings in employer-sponsored pension plans.

I agree that personal accounts alone cannot fix Social Security’s solvency problems. However, addressing the long-term retirement security needs of future retirees ultimately cannot be met without some form of personal accounts and stronger incentives to increase personal saving.

The bill will be referred to the Senate Finance Committee.