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Progressive indexing: Effect on benefits
Bush's call to change benefits formula will reduce what middle and high earners receive.
April 29, 2005: 6:38 PM EDT
By Jeanne Sahadi, CNN/Money senior writer
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NEW YORK (CNN/Money) - In calling for Social Security reform, President Bush has said that he wants to protect lower-income workers' benefits. To do so and improve the system's finances, he endorsed changing the way starting Social Security benefits are calculated for middle- and high-income workers.

He indicated the change would be similar to a "progressive indexing" proposal. That proposal would lower future benefits for middle- and high-income workers relative to what is currently promised.

Low-income workers, meanwhile, would see no change in their promised benefits.

Below are estimates of how progressive indexing could affect future retirees. Keep in mind when evaluating reform proposals that if nothing is done to change the benefit structure, the Social Security Trustees project the system will be insolvent by 2041, at which point it will only be able to pay out 74 percent of promised benefits.

How progressive indexing works

With progressive indexing, low-income workers would continue to see their starting benefits linked to the growth in wages over their careers. That's the formula currently used for all new retirees.

But high- and middle-income workers' benefits would be subject to different formulas.

High-income workers' starting benefits would be linked to price growth which is a lesser measure since prices tend to grow more slowly than wages.

For example, under progressive indexing, a maximum-income worker retiring at age 65 in 2045 would get an annual starting benefit of $22,829 (in 2005 dollars), which is 29 percent or about $9,000 -- less than what he is currently promised, according to an analysis by Jason Furman, a senior fellow at the Center on Budget and Policy Priorities.

It should be noted, Furman has been a critic of the president's proposals for Social Security reform. But his calculations are based on -- and in many cases drawn directly from -- reports of the Social Security Chief Actuary and from the 2004 Social Security Trustees report.

In addition to a decline in promised dollars, under progressive indexing the benefits of higher and medium earners will replace less and less of their pre-retirement income for each successive group of retirees.

For example, under a progressive price indexing model, a maximum earner who is 25 today and will retire in 2045 would receive benefits that replace 17 percent of his pre-retirement income.

A maximum earner who will be born in 2010 and retire in 2075 would receive benefits that replace only 12 percent.

Middle-income workers' starting benefits, meanwhile, would be calculated using a combination of both the wage and price indexes.

For example, a worker retiring in 2045 (whose average earnings are equivalent to about $58,000 today) would get a starting benefit of $19,858, or about 25 percent less than what the current system promises him.

A worker retiring in 2045 (whose average earnings are equivalent to about $36,500 today) would receive a starting benefit of $16,584. That's 16 percent less than what the system promises today.

Income levels still to be defined

Bush has not specified what would define a lower income worker that, he said, is something to be negotiated.

Today, a low-income worker is classified as someone making less than $20,000; a maximum earner makes more than $90,000.

But the creator of the progressive indexing plan -- Robert Pozen, chairman of MFS Investments and a Democrat who served on the President's Commission to Strengthen Social Security -- did suggest income breakpoints.

Under his plan, which calls for progressive indexing to be implemented in 2012, he defines low-income workers as anyone making less than $25,000 in 2012; a middle-income worker as someone who makes more than $25,000 but less than $113,000; and a maximum-earner as someone who makes more than $113,000.  Top of page

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