We issued a report yesterday debunking a proposal with a soothing name: progressive price-indexing. It has popped up frequently since 2005, most recently in the Roadmap for America’s Future, the budget proposal of Congressman Paul Ryan, who is expected to chair the House Budget Committee in the next Congress. In a nutshell, the proposal would tie initial Social Security benefits to future changes in prices rather than average wages. Despite the “progressive” moniker, this approach is seriously flawed:
It would significantly cut future benefits for most workers — including many with quite modest incomes — compared to currently scheduled levels. Under the leading proposal (which Ryan included in his plan), benefits in 2080 would be reduced by nearly 30 percent for those who earned medium wages (about $43,000 in 2010 dollars) and by as much as 50 percent for higher earners. And those are cuts in benefits that are already low compared to those of other rich countries.
It would consign future retirees to fall further and further behind their previous standard of living — and behind the rest of society — over time. That’s because price indexing would steadily reduce the fraction of workers’ past earnings that Social Security benefits replace.
It would weaken — and eventually, for most workers, eliminate — the link between their earnings and the benefits they get upon retirement. That would represent a sharp change in the program’s philosophy and would risk undercutting its broad base of support.
It does not represent a balanced approach to fixing Social Security’s financing shortfall because it would close an overly large share of the gap through benefit cuts.