The Regressive Impact of the Progressive Indexation of Social Security

By Dean Baker


Executive Summary

This paper examines the distributional impact of the formula for the progressive price indexation of Social Security benefits that President Bush endorsed in his April 28 press conference. This formula would not change the current indexation of benefits for the bottom 30 percent of wage earners, but would change the basis of indexation for the highest wage earners from wages to prices, thereby holding the real value of Social Security benefits for maximum wage earners (those earning $90,000 or more a year in 2005) constant through time. Workers who are above the 30 percent cut off would see their benefits rise somewhere between the rate of wage growth and price growth.

While this schedule of benefit cuts is supposed to be progressive, the calculations in this paper show that middle--income earners would see large and growing benefit cuts (measured against currently scheduled benefits) under this formula:

* In 2030, a middle wage earner ($36,500 in annual earnings in 2005) would see a benefit cut of 12.2 percent, while a high wage earner ($58,400 in 2005) would see a benefit cut of 13.2 percent;

* In 2050, a year when the Congressional Budget Office projects that Social Security would still be able to pay full scheduled benefits if no changes are made, middle wage earners would see a cut equal to 21.1 percent of their scheduled benefit, while high wage earners would see a cut equal to 28.3 percent of their scheduled benefit;

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* Measured relative to retirement income, the benefit cuts implied by progressive indexation are regressive. The projected cut in benefits for a middle wage earner in 2080 is equal to 26.9 percent of their retirement income, while the implied cut for a maximum wage earner would be equal to just 11.9 percent of their retirement income.

<snip> In other words, the cuts implied by progressive indexation will hit middle-income workers hardest;

http://www.cepr.net/publications/regressive-progressive_2005_03.pdf