Bush's “Progressive Indexation” Plan Would Lower Rates of Return for Most Americans
For Immediate Release: Wednesday, May 11, 2005
Contact: Lynn Erskine, 202-293-5380 x115
Washington, DC -- The “progressive indexation” proposal endorsed by President Bush would reduce the rate of returns that most workers would receive from Social Security, according to a report by the Center for Economic and Policy Research (CEPR).
The study, “Social Security Rates of Return with Progressive Indexation,” calculated rates of return for wage earners corresponding to Social Security Administration's definition of low earners, medium earners, high earners, and maximum earners. It found that progressive indexation leads to a growing decline in the rate of return for middle earners ($36,500 in 2005). The rate of return for a middle earner retiring in 2045 falls from 2.5 percent under current law to 1.9 percent with progressive indexation. By 2085, the gap would be 1.2 percentage points, with the rate of return dropping from 2.7 percent to 1.5 percent. This would be true whether or not they opted to take a private account.
“If the purpose of reforming Social Security is to increase rates of return from what workers would receive under current law, then progressive indexation clearly fails this test,” said Dean Baker, author of the report and CEPR co-director.
The study calculated the rates of return for workers retiring at age 65 in 2025, 2045, 2065, and 2085 with progressive indexation of benefits, as well as the impact of opting for a private account.
For most workers, the rate of return is not affected by taking a private account, since the returns on these accounts, net of administrative expenses, will be very close to the 3.0 percent real interest rate charged against workers defined Social Security benefit under President Bush's plan. As intended, the rates of return for low earners ($16,400 in 2005) are not affected by progressive indexation.