Friday, April 29, 2005

Fixing Social Security, and the Democrats

President Bush preempted Democratic objections to his Social Security plan by acknowledging the historical greatness of the program while urging Congress to adopt changes that would preferentially benefit low-income retirees of the future.

"Social Security's provided a safety net that has provided dignity and peace of mind for millions of Americans in their retirement," Mr. Bush said at the beginning of the news conference. "Yet there's a hole in the safety net because Congresses have made promises it cannot keep for a younger generation." He also renewed the promise of FDR: "If you work hard and pay into Social Security your entire life, you will not retire into poverty."

The President’s fix should appeal to lower income workers, the natural constituency claimed by the Democratic Party.

"I believe a reformed system should protect those who depend on Social Security the most," the President said. "So I propose a Social Security system in the future where benefits for low-income workers will grow faster than benefits for people who are better off."

The system currently pays higher income retirees more than those who earned lower incomes during their working years. Furthermore the payment gaps increase over time since the payments increase by amounts that are indexed to the percent increase of wages. Thus if one retiree receives $10,000 per year and another $15,000, then after 10 years of, say, 3%/year increases, the payments will be $13,440 and $20,160, respectively. Under the President’s plan the wealthier retiree’s payment would be indexed to the cost of living which is somewhat less than the wage increases. Thus for a 2% COLA the higher income employee’s payment would be $18,285 after 10 years.

The savings accrued would close most of Social Security's long-term financial gap, about 70%, according to Social Security actuaries.

The President also emphasized the importance of personal retirement accounts: "Any reform of Social Security must replace the empty promises being made to younger workers with real assets. I believe the best way to achieve this goal is to give younger workers the option of putting a portion of their payroll taxes into a voluntary personal retirement account," he said. "Because this money is saved and invested, younger workers would have the opportunity to receive a higher rate of return on their money."

In other words, if personal retirement accounts are good for 70 million government employees, then they are probably good for the rest of us. You’d think that the Democrats would agree. I wonder why they don't?


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