Pozen Explains Progressivity and Proposes a High Earner Compromise

OpinionJournal: "Although President Bush's proposal for progressive indexing of Social Security preserves the scheduled benefits of all low-wage workers as well as all workers retiring before 2012, the critics have lambasted its 'benefit cuts' for middle- and high-wage earners. These critics suggest that reductions in scheduled benefits can easily be avoided by raising payroll taxes.

Judging any reform plan relative to scheduled benefits is misguided. The schedule represents the benefits we have promised but do not have the money to deliver. That is why Social Security has a long-term deficit with a present value of $3.8 trillion. If the litmus test of a reform plan is not cutting scheduled benefits for any significant group of workers, then no viable plan to restore Social Security's solvency will pass muster...

More fundamentally, any increase in the payroll tax base must address the issue of political support for Social Security. Critics of progressive indexing have alleged that it will erode political support for the system among high-wage earners because their benefits would grow more slowly than under the current schedule. Yet these same critics are the ones urging substantial increases in payroll taxes for high earners. Will the political support of high earners be more likely to erode if they face a large hike in their payroll taxes for the rest of their working careers, or if they receive less than the current schedule of Social Security benefits when they retire in 20 or 30 years? The answer is obvious."

Mr. Pozen also floats an idea of a 2.9% social security surtax on earnings above $90,000 and concludes his article with the following:

"If Congress is attracted by a package of Social Security reforms combining a milder form of progressive indexing with a 2.9% surtax on earnings above $90,000, it must provide high earners with retirement benefits attractive to them. One possibility would be to devote 1.45% of the surtax to Social Security solvency, and to allow the other 1.45% to be allocated to a personal account invested in market securities. Since such an account would not divert existing taxes away from Social Security, it would not involve any increase in government borrowing. In short, the combined approach would let both parties win--Democrats would get a mix of higher taxes and progressive benefit changes, while Republicans would get personal investment accounts and constraints on benefit growth. And the solvency of Social Security would be restored for all American workers. "