NEW YORK (CNN/Money) – In a news conference Wednesday, President Bush characterized as "interesting" a proposal for Social Security reform that would preserve starting benefits for lower-income workers but change them for middle- and high-income workers.
In noting that there were some interesting reform ideas circulating, the president acknowledged one in particular that was proposed by Robert Pozen, the chairman of MFS Investment Management, the former vice chair of Fidelity Investments and a former member of the President's Commission to Strengthen Social Security.
Pozen has proposed a different way of calculating starting benefits for new retirees. Currently, starting benefits for retirees at all income levels are linked -- or indexed -- to wage growth. To help the system achieve solvency, there have been proposals to change the indexing of starting benefits to the growth in prices, which tend to rise more slowly than wages.
Pozen's proposal uses both. Here's how: The starting benefits of lower income workers would continue to be indexed to wage growth, while the starting benefits of higher income workers would be indexed to price growth. For middle-income workers, a combination of both indexes would be used.
In addition, Pozen has proposed allowing workers to divert up to 2 percentage points of their payroll taxes into individual investment accounts.
In other comments, the president acknowledged that individual investment accounts -- the centerpiece of his guidelines for reform -- will not make the system solvent, but rather will make the solution – which very likely will include benefit reductions from what is promised – more attractive to younger workers.
"Personal accounts do not solve the issue. Personal accounts will make sure that individual workers get a better deal with whatever emerges as a Social Security solution," he said.
That's a possibility but not a guarantee. First, the accounts are subject to investment risk – even though workers may only be allowed to invest in a conservative mix of stocks and bonds. And second, under the president's stated guidelines, the worker would need to earn a better than 6.3 percent rate of return to come out ahead of where he would had he chosen to get all his benefits from the traditional system.