Future Social Security benefits could be cut almost in half for some younger workers under a plan President Bush is considering for overhauling the nation's retirement system.
The White House said Tuesday that the president has not endorsed a specific plan for reforming Social Security, but a spokesman stopped short of denying a Washington Post report that the administration is briefing congressional types on a plan to cut promised benefits for future retirees, reports CBS News Correspondent Mark Knoller.
The administration expects at least some of the benefit cuts will be made up by gains from the personal investment accounts it also hopes to create.
The administration is said to be focusing on a proposal that would allow younger workers to invest up to 4 percent of their payroll taxes in private accounts, with contributions limited to about $1,000 to $1,300 a year, an official said Tuesday.
The official, who spoke on condition of anonymity, said the size of the private accounts could be similar to a proposal by Sen. Lindsey Graham, R-S.C., and a plan from President Bush's 2001 Social Security commission.
Both would let workers divert 4 percent of their payroll taxes into accounts, while the remaining 2.4 percent they pay would continue going into the current system. The federal 12.4 percent payroll tax is split between workers and employers.
Graham's plan calls for the annual contributions to be capped at $1,300, while the commission proposed a lower limit of $1,000.
The Post said the Bush administration is telling congressional allies it plans to propose changes to the formula that sets initial Social Security benefit levels – changes that could cut payments by small amounts in the early years and by more than half for those retiring in 2075.
Republicans close to the White House tell the Post the new benefit formula for first-year retirees would be based on inflation rates, not on the increase in earnings over a retiree's lifetime. Since inflation generally rises much slower than wages, benefits would grow more slowly under the new formula.
The Post reports the administration plans to unveil its proposal in late February or March, and says the White House is prepared for negative reaction.
"This is going to be very much like sticking your hand in a wasp nest. And the reaction will be similar," David C. John, an analyst at the conservative Heritage Foundation, tells the newspaper.
The current formula for setting initial benefits is based on the average annual wages a worker earns in his 35 highest-paid years, adjusted to the standard of living near his retirement age. Under the Bush proposal, that adjustment would be based on "price indexing," or the rise in consumer prices, rather than on rising wages.
The new formula would save trillions of dollars in expenditures and fix Social Security's long-term deficit, but workers would see their benefits cut – slowly at first, then more rapidly in coming decades. The Social Security Administration's chief actuary estimates a middle-class worker who retires in 2022 would have his guaranteed monthly benefits reduced by 9.9 percent. Those loses would fall by more than a quarter by 2042. And by 2075, a retiree would receive roughly half the current benefit.
Opponents of the proposal argue that it would consign future retirees to today's standard of living.
"It's like saying elderly people today should live at a 1940 standard of living," Robert Greenstein, executive director of the liberal Center for Budget and Policy Priorities told the Post. "Part of our social contract has been to allow seniors to participate in rising standards of living rather than consigning them to some second-class status in retirement."
Advocates of the president's plan say the proposed private investment accounts will help alleviate the benefit cuts.
"If this was a case of just price indexing and doing nothing else, frankly, some of the charges are pretty valid," the Heritage Foundation's David C. John said. "But if you give the personal accounts as well, you're giving people the opportunity to make up the difference. Not everyone will do that, but a substantial number will."