MFS Investment Management Chairman Robert C. Pozen, architect of a strategy that President Bush would like to use as the basis for Social Security reform, is now urging lawmakers to move beyond the headline-grabbing issue of private accounts and address the real stickler behind ensuring the pension fund's long-term solvency: the inevitability of benefit constraints.

Critics have assailed Pozen's "progressive indexing" plan because although it would preserve or even enhance the benefits that lower income workers currently receive in retirement, it would trim those that higher earners are awarded. They also don't like its link to Bush's controversial private accounts, which would allow workers to divert a portion of their Social Security payroll tax into a mix of stock and bond funds.

"Mr. Pozen's [plan] would cut benefits for people who earn as little as $20,000 a year," said Sen. Charles E. Schumer (D-N.Y.), in a statement shortly after Bush publicly endorsed progressive indexing on national television on April 28. "Privatization plus deep benefit cuts to middle class citizens is even worse than privatization alone."

Sen. Max Baucus (D-Mont.), who was first to voice concerns over the benefit cuts in progressive indexing during Pozen's April 26 testimony before the Senate Finance Committee, said in a statement, "The plan would mean additional cuts for Americans, and that's just not right."

But what's really wrong, Pozen said in an interview just hours before the president's endorsement, is judging a Social Security reform package by the question of whether it would preserve scheduled benefits.

"Of course it can't get you scheduled benefits, otherwise we wouldn't have a problem to begin with," he said. "There's no magic bullet. Anyone who says the problem with any reform proposal, not just progressive indexing, is that it gives some worker, in 2079 or 2055, 21% less than the schedule is wrong. It's a false criticism because we know that by 2040 the average worker's benefits are going to go down by 25% if we do nothing. They'll actually be better off than they would be under the [current] system.

"The cheapest political date in town is to say some proposal doesn't get people scheduled benefits. We keep concentrating on whether someone reaches scheduled benefits [and] there is no reform proposal that is going to reach that criteria. None. Absolutely none."

That argument, Pozen added, also fails to take into account the anticipated rise in purchasing power of the middle-income worker. Under progressive indexing, it increases 21% by 2055, "so the question is, should we be focusing on some 20% less in benefits or some 20% more in purchasing power," he asked.

The meat and potatoes of Pozen's plan, however, is solvency. Without additional reforms - that means, for example, no private accounts, no payroll tax raises and no adjustments in the retirement age - progressive indexing would close the long-term deficit of Social Security by more than 70%, or, in other words, take it from a present value of $3.8 trillion to about $1.1 trillion. To preserve the scheduled benefits of current retirees and those nearing retirement, it would begin in 2012, Pozen said.

Under the current system, as Pozen outlined in his testimony before the Senate Finance Committee, after workers retire and begin to receive benefits, those benefits are increased annually through "price indexing," which is basically a cost-of-living adjustment based on consumer prices. By contrast, he said, when the initial benefits of workers are set at the time of their retirement, their average career earnings are adjusted upward by the rate at which American wages have increased during their careers. That's "wage indexing."

Progressive indexing would preserve wage indexing for workers who retire in 2012 and beyond whose career earnings are $25,000 or less annually. Pozen said his plan retains wage indexing for low-income workers because most do not have additional sources of retirement income, such as a 401(k) or an IRA. But for those people with career earnings greater than $113,000, their benefits would be increased according to price indexing. For those folks in between, Pozen noted, a proportional mix of wage and price indexing would be applied to their career earnings.

And it's those "middle-earners," whose benefits would grow more slowly with progressive indexing than the current system, that are being shortchanged, critics claim.

"I said at the hearing, that if you don't want to have so much benefit slowdown, I could recalibrate the formula and give you a milder form. But then you're going to have to add revenue, or you're going to have to make some sort of benefit change," he said.

That means raising payroll taxes or rolling back the retirement age, two options no politician is likely to embrace, Pozen said.

But if a softer form of progressive indexing is sought, Pozen's suggestions include terminating plan his plan at a date prior to 2079 and returning to a wage indexing system across the board. But to continue moving the system toward long-term solvency, that plan would have to be accompanied by a rollback in the retirement age. If, for example, progressive indexing was halted in 2061, the retirement age could be moved to age 68.5 at a rate of one month every calendar year during an 18-year period ending in 2079.

Raising payroll taxes is another option. Perhaps, Pozen said, a 2.9% payroll tax on earnings greater than $90,000 annually without an earnings limit could be combined with progressive indexing. Such a plan would have to come with substantial benefits for workers in that bracket, he said.

Or, Pozen said, his plan could be mated with the private accounts Bush has proposed, although the amount "carved out" of the existing 12.4% payroll tax would be more like 2%, versus the president's 4%. Moving 2% of the payroll tax into a low-cost balanced account comprised 60% of an equity index fund and 40% of a bond index fund, Pozen said, "would have a good chance of earning higher returns then the Social Security system over 30 to 35 years," or the entire career of a typical worker.

Government borrowing would also be less if private accounts were combined with progressive indexing. Borrowing wouldn't be eliminated, however, Pozen warned. But with his plan, no borrowing would be necessary until 2079 and the amount would be $2 trillion less than what would be needed to finance the current Social Security system over the next 75 years.

That doesn't make Pozen a fan of private accounts, though.

In fact, he thinks an "add-on" account might be a more appropriate complement to progressive indexing than a carve-out. He suggests enhancing the structure of IRAs, perhaps by transforming the low-income tax credit for IRA contributions into a partially refundable tax credit. That would make the tax credit effective for families with incomes below $40,000 annually, he said. Another alternative, Pozen proposed, would be removing the cap from the Roth IRA, which currently starts to phase out families with incomes greater than $120,000 annually. That might also placate the politically powerful, high-income workers, since they'll get the slowest benefit growth under progressive indexing.

For the record, Pozen doesn't think a carve-out account, either combined with progressive indexing or instituted independently, will bear any reward to the mutual fund industry.

"The president's carve-out accounts would have no impact. We're not going to have a situation where people can pick and choose financial institutions," said Pozen, who characterized his interest in Social Security reform as an "avocation" that stems from the combination of a recent foray into teaching and his days on a presidential panel in 2001 that examined the issue. "I don't do it to promote the fund industry, that's for sure."

Although Bush said in his address to the nation that he's willing to make the proposal for private accounts a voluntary choice for workers, Pozen said it's going to take that sort of flexibility and more to push meaningful Social Security reform through.

"There is actually consensus on the fact that we need to do something," said Pozen, who called the Senate Finance Committee hearing "a pretty hostile meeting."

If the president does soften his stance on private accounts, Pozen said, Republicans and Democrats have to have a serious discussion about to what extent a reform package would include benefit restraints, or perhaps even additional payroll taxes.

The G.O.P. will hold hearings on Social Security throughout the month of May and has pledged to deliver a reform plan by next month. For their part, Democrats are shopping for support among Republicans like Sen. Gordon Smith of Oregon, who is undecided over the issue of private accounts. Experts say it's unlikely that Democrats would enter a discussion on reform if the possibility of private accounts still exists.

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