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Bush: Change benefit formula
President wants faster Social Security payout growth for lower-income workers.
April 29, 2005: 12:07 PM EDT
By Jeannne Sahadi, CNN/Money senior writer
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NEW YORK (CNN/Money) - Sticking to his guns on individual accounts, President Bush said Thursday evening that he would like Social Security reform to ensure that the benefits for lower income workers grow at a faster rate than the benefits of higher income workers.

"If you work hard and pay into Social Security your entire life, you will not retire into poverty," the president said at a primetime televised news conference, where he was expected to offer greater detail on options he would endorse to address the long-term shortfalls facing Social Security.

In effect, however, his recommendation would reduce the growth rate in benefits for higher income earners while maintaining the growth rate in lower income workers' benefits.

President Bush also said he wanted to guarantee that the Social Security benefits of future retirees would be equal to or greater than the benefits today's seniors get. But he did not say whether he meant in nominal terms -- which would be worth far less in terms of purchasing power -- or in inflation-adjusted terms.

And he reiterated that there would be no changes to the benefits of anyone born before 1950 and to those currently receiving disability checks.

What he did not do was back down from his desire for workers to be given the option of investing in individual accounts and funding them with a portion of their payroll taxes that otherwise would be paid into the system.

Leading Democrats, meanwhile, have said the account option is a non-starter for negotiations about Social Security reform.

Here's a rundown of what the president said and did not say with regard to his expressed preferences for changing Social Security:

How starting benefits are calculated: The president endorsed the use of a sliding-scale benefit formula to determine future retirees' starting benefits. His plan would maintain the growth in benefits for lower-income workers at a rate faster than inflation. But for wealthier seniors, he advocated that benefits grow at the rate of inflation.

At what level a worker would be considered "low income" or "high income" is to be negotiated, the president said.

The president's recommendations are similar to a plan known as "progressive indexing," put forth by Robert Pozen, chairman of MFS Investments and a Democrat who served on the President's Commission to Strengthen Social Security.

Under Pozen's plan, the starting benefits of lower-income workers would continue to be indexed to wage growth as they are now for everyone. But the starting benefits of high-income workers would be indexed to price growth. Since prices tend to grow more slowly than wages, that means they would see a reduction in benefit growth.

For middle-income workers, a combination of both indexes would be used.

Such a move would fix about 75 percent of Social Security's financial problems.

Critics of Pozen's plan argue that it reduces benefits too sharply and they would prefer a plan to shore up the system's shortfall that uses a combination of solutions -- including not only a benefit reduction but also a tax increase.

Change in payroll taxes: The president stressed again that he would not consider a reform plan that increases the payroll tax rate -- which currently is 12.4 percent on wages up to $90,000, half of which is paid by workers and half by their employers.

"I will work with Congress on any good-faith proposal that does not raise the payroll tax rate or harm our economy," the president said.

He did not, however, specify whether he would support raising the cap on the amount of wages subject to the payroll tax, something he previously has indicated he might support.

Add individual investment accounts: "Our duty to save Social Security begins with making the system permanently solvent, but our duty does not end there. We also have a responsibility to improve Social Security ... by making it a better deal for younger workers," the president said.

He seemed unwavering in his endorsement of giving younger workers the option of investing in individual accounts. Some Republicans have expressed skepticism about Bush's account proposal, and most Democrats have flatly opposed it, since Bush's plan is to have workers fund those accounts by diverting payroll taxes they otherwise would pay into the system.

What's more, Americans have yet to give individual investment accounts their wholehearted endorsement. Fifty-one percent said they opposed accounts in a recent ABC News/Washington Post poll, while 64 percent said they disapproved of the president's handling of Social Security.  Top of page

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