A Gut Punch to the Middle

By PAUL KRUGMAN

Published: May 2, 2005

The New York Times

B y now, every journalist should know that you have to carefully check out any scheme coming from the White House. You can't just accept the administration's version of what it's doing. Remember, these are the people who named a big giveaway to logging interests "Healthy Forests."

Sure enough, a close look at President Bush's proposal for "progressive price indexing" of Social Security puts the lie to claims that it's a plan to increase benefits for the poor and cut them for the wealthy. In fact, it's a plan to slash middle-class benefits; the wealthy would barely feel a thing.

Under current law, low-wage workers receive Social Security benefits equal to 49 percent of their wages before retirement. Under the Bush scheme, that wouldn't change. So benefits for the poor would be maintained, not increased.

The administration and its apologists emphasize the fact that under the Bush plan, workers earning higher wages would face cuts, and they talk as if that makes it a plan that takes from the rich and gives to the poor. But the rich wouldn't feel any pain, because people with high incomes don't depend on Social Security benefits.

Cut an average worker's benefits, and you're imposing real hardship. Cut or even eliminate Dick Cheney's benefits, and only his accountants will notice.

I asked Jason Furman of the Center on Budget and Policy Priorities to calculate the benefit cuts under the Bush scheme as a percentage of pre-retirement income. That's a way to see who would really bear the burden of the proposed cuts. It turns out that the middle class would face severe cuts, but the wealthy would not.

The average worker - average pay now is $37,000 - retiring in 2075 would face a cut equal to 10 percent of pre-retirement income. Workers earning 60 percent more than average, the equivalent of $58,000 today, would see benefit cuts equal to almost 13 percent of their income before retirement.

But above that level, the cuts would become less and less significant. Workers earning three times the average wage would face cuts equal to only 9 percent of their income before retirement. Someone earning the equivalent of $1 million today would see benefit cuts equal to only 1 percent of pre-retirement income.

In short, this would be a gut punch to the middle class, but a fleabite for the truly wealthy.

Beyond that, it's a good bet that benefits for the poor would eventually be cut, too.

It's an adage that programs for the poor always turn into poor programs. That is, once a program is defined as welfare, it becomes a target for budget cuts.

You can see this happening right now to Medicaid, the nation's most important means-tested program. Last week Congress agreed on a budget that cuts funds for Medicaid (and food stamps), even while extending tax cuts on dividends and capital gains. States are cutting back, denying health insurance to hundreds of thousands of people with low incomes. Missouri is poised to eliminate Medicaid completely by 2008.

If the Bush scheme goes through, the same thing will eventually happen to Social Security. As Mr. Furman points out, the Bush plan wouldn't just cut benefits. Workers would be encouraged to divert a large fraction of their payroll taxes into private accounts - but this would in effect amount to borrowing against their future benefits, which would be reduced accordingly. (...)