Last week we explained how the president's dramatic Social Security news -- important enough to preempt "The O.C." on prime-time television -- amounted to an unsurprising statement of what we pretty much knew already: that his big plan for Social Security's solvency is just a big benefit cut for the middle class. Now come the predictable attacks from his "amen corner" of Privateers and professional blowhards. Let's see, because Bush used the word "progressive," we're supposed to be swooning all over it? Not so fast -- his indexing is a pitiful halfway attempt which is objectively worse than doing nothing for the vast majority of Americans -- and most likely, worse for everybody.

MYTH: "Progressive price indexing" is not a cut

I have been touting this idea of blended benefits, blended indexing of benefits for a long time... [B]asically, it means that those at the upper end will not get any cut in benefits.  As the president said, everybody will get as much benefits as they would get under the present plan, but the acceleration of their past payments for inflation will be tied directly to inflation, so that the people at the very top will get an exact inflation number, and the people at the bottom will get a little better than inflation, because they need it more.  (Sen. Bob Bennett, R-UT, Scarborough Country, MSNBC, 4/28/05)

Solving nearly three-fourths of Social Security's long-term financing problems, while still allowing real initial benefit levels to continue to rise for the overwhelming majority of workers, represents a major, positive step forward. Democrats who reflexively reject the progressive price-indexing option reveal themselves to be more interested in demagoguing Social Security than in rescuing it. (Editorial, "Outlining Social Security reform," Washington Times, 4/30/05)

[T]he Social Security debate now features a new, perverse kind of Democratic class warfare — a struggle to keep as many Social Security benefits as possible flowing into the hands of the well-off. Maybe Paris Hilton doesn’t deserve her inheritance, but her astronomically wealthy father, Rick, apparently deserves every last penny he can wring from the Social Security Administration when he retires. Democrats have been twisted into this position by their reflexive opposition to President Bush’s latest Social Security proposal. (Rich Lowry, "Saving Social Security's dishonesty," National Review, 5/3/05)

REALITY

Is it a benefit cut? Yes, it is, and quite a large one -- larger than doing nothing. The claim the Privateers are making is that we shouldn't compare benefits scheduled in the future with future benefits under this plan. So they say that under Bush's plan, everybody will get at least the same benefit they get today -- well, whoopty-do! What they don't tell you is that, if the pessimistic projections of the Trustees come true, and if nothing is done to Social Security, then the money coming in to the program every year is enough to cover a higher benefit for everyone than they get today.

But -- again, if the Trustees' projections come true -- that automatic cut if nothing is done would amount to around 70-80% of scheduled benefits -- an cut of up to 30%. Higher than today's benefits, but lower than what is promised. Bush's indexing scheme proposes a complicated cut for anybody earning more than $20,000 -- for an average worker, the cut would grow from 12.2% in 2030 to 21.1% in 2050 to 40.2% in 2080. For an above-average worker earning $58,400, the cut would grow from 13.2% in 2030 to 28.3% in 2050 to 50.1% for someone retiring in 2080 (Dean Baker, CEPR). By then, these cuts will basically flatten benefits, so that workers would receive a minimum amount no matter how much they paid in.

However -- Bush's cuts only account for 57% of the supposed shortfall. The claim of 72% or "almost three-fourths" is based on a plan by Robert Pozen involving cuts in disability insurance, but Bush's plan eliminates those cuts. So to really compare Bush's indexing to doing nothing, we would have to chop off another 15% or so from workers of all incomes.

All of this takes for granted the Trustees' projections, but as we have noted, those projections assume very severe economic stagnation in perpetuity. For example, the Trustees assume 1.8% growth, as compared to 3.5% in the last 75 years. If we change that to 2.2%, the Trust Fund will never run out, and even assuming 1.8% forever and just six years of 3.5% growth, we're still in gravy if we do nothing. On the other hand, if economic performance exceeds the very low bar set by the Trustees, Bush's cuts get even deeper, inversely proportional to good news.

This isn't "reflexive opposition" -- this is basic math. Bush's cuts are much, much worse for the middle class than doing nothing -- and they only cover a bit more than half of the supposed shortfall!

But is it OK, because the cuts are "progressive"? Use of the word "progressive" is pretty clever. But, as we explained last week, Social Security is not a "welfare program" -- it provides insurance against inadequate retirement funds for all workers, and it is the bedrock of retirement security for the middle class. While Bush's benefit cuts protect below-average workers -- those earning $20,000 or less -- the vast majority of the middle class would get deep cuts.

And while the harsh indexing is applied gradually from low-income workers to workers earning $90,000 and up, there is a curious regressive impact, as Dean Baker of the Center for Economic and Policy Research argues. For average earners, Social Security provides a much higher portion of their retirement income, so cuts to guaranteed benefits hit them much harder than they hit wealthier people. By 2080, someone earning $90,000 -- the maximum amount taxed by Social Security -- would get a 60% benefit cut with Bush's plan, which amounts to 11.9%, on average, of their retirement income. Meanwhile, a typical middle earner ($36,500) would get a 40% benefit cut, but that cut would amount to 27% of their retirement income.

And millionaires -- the Rick Hiltons -- wouldn't even notice it.

Privateers are having a hard time coming up with any proposal that is superior to doing nothing, in terms of the supposed "crisis" in Social Security's financing. We have known from the beginning that small benefit cuts combined with small revenue increases -- for example, raising the payroll cap -- could close the shortfall without anybody feeling too much pain and while keeping the system intact. And yet, Privateers seem to be capable only of desperado ventures that undermine the integrity of the system -- like this indexing, which eventually will give everyone the same fixed benefit no matter how much they pay in, and like privatization, which carves out a third of the system and, with its clawback, comes close to eliminating the entire guaranteed benefit for many workers.

Why is that? Why do Privateers seem uninterested in the boring but effective adjustments their own crisis-mongering demands? We don't pretend to know their motivation. But some things are clear about their ideology. Briefly, here are two points:

MYTH: Social Security is too generous

If the accounting goes forward as it now threatens to do, Social Security will give the retired American who lives to age 80 twice or three times what he invested in the Social Security program. (William F. Buckley, Jr., "What we lost at the Astor," National Review, 5/3/05)

REALITY

Old Buckley expresses an important part of the Privateers' ideology -- that Social Security is too big. It's a large part of the federal government, and we all know what conservatives think about Big Gummint. Usually, public officials do not say outright that Social Security is too generous, but there you have it. (I have no idea where he came up with those numbers. It certainly contradicts the "bad investment" sector of Privateer jargon.)

However, I think if you asked any of the approximately 50% of seniors who would live in poverty without Social Security, I believe they would tell you the modest income from this insurance is not over the top. It is a guarantee of adequacy -- nobody is getting rich, but very few are destitute.

MYTH: Social Security is patronizing

Finally, after suffering through months of demagoguery from Social Security reform opponents, we're beginning to see their true motivation: You're just too stupid to manage your own money. (Ed Frank, "Can't manage your own money?" Washington Times, 5/1/05)

REALITY

Ed Frank, an officer in "Americans for Prosperity" (a privatization front group) fills in another aspect of Privateers' ideology. This is the supernatural belief in the power of the stock market. In the 1990s, many Americans shared this faith, although the burst of the tech bubble, the scandals at Enron and elsewhere, and the recession and widespread pension loss kind of deflated that viewpoint. But it is fundamental to a certain kind of conservative.

It happens that this kind of conservative also loves watching the Wall Street ticker, and they assume that everybody shares this love. I don't find such a hobby all that fun or interesting. Maybe it's like pumping iron or watching reality TV -- I just don't get it. But it takes all kinds.

The important thing that these anti-government ideologues miss, however, is that there are some things the market cannot or will not provide. Social Security gives all workers insurance against disability, a death of a breadwinner, living too long, and, most importantly, lack of adequate retirement income, whether through bad planning or bad luck.

Let me be clear: private investment cannot provide these things guarantees. There is no risk in Social Security. This fundamental, risk-free guarantee of adequate income is a crucial component of anybody's retirement plan, the bedrock of a smart, diverse portfolio. The higher-risk, higher-yield stocks might give you a good amount of money when you retire, but you don't know that when you start working. Why bet your life by taking out the bottom? Only a fool would make that trade.