MFS Investment Management Chairman Robert Pozen detailed his "progressive indexing" proposal before the Senate Finance Committee in Washington on Tuesday, claiming it could close the long-term deficit dilemma confronting Social Security by more than 70%.

Laid out initially to the Boston financial press after President Bush issued his State of the Union appeal for solutions to ensure solvency of the 75-year-old government-sponsored pension fund, Pozen's proposal has been gaining traction in recent weeks.

In fact, during a mid-March press conference, Bush cited Pozen by name and called the former Fidelity Investments executive and Harvard Law instructor's Social Security proposal "interesting."

Sen. Orrin Hatch (R-Utah) echoed Bush's sentiments by telling Pozen, a Democrat, that he's "very interested" in the proposal.

Pozen, however, made one point abundantly clear to the senators during his opening remarks: Bush's plan for creating personal accounts, otherwise known as private accounts, will not singularly ensure solvency of Social Security as masses of Baby Boomers enter retirement in coming years.

Bush's private accounts, which would likely come under supervision of a Wall Street money manager, call for about 4% of the 12.4% payroll tax to be diverted into a mix of stock and bond funds. Sentiment on Wall Street over managing thousands of small accounts is mixed, and for its part, the Investment Company Institute is merely backing a debate on the topic.

But Pozen thinks that progressive indexing could be combined with other reforms, like moving back the retirement age, or adding revenue raisers, such as an increase in the wage base subject to payroll taxes, to close the fund's deficit from its current value of $3.8 trillion to roughly $1.1 trillion.

Progressive indexing could also be combined with private accounts, but Pozen favors diverting 2% from the payroll tax, rather than Bush's 4%. Pozen's plan would kick in by 2012, about five years before Social Security spending is expected to exceed the contributions it receives.

So how does it work? In short, benefits for workers earning $25,000 or less annually would continue to track a wage index, or the rate at which an average worker's income increases over their career. But for those earning $113,000 or more, their benefits would track a price index. In other words, their benefits would be adjusted to reflect cost of living increases.

The flaw with the current system, Pozen noted, is that all benefits track the more costly wage index. That element would be preserved for low-income beneficiaries, he said, because "most low wage workers do not have sources of retirement income other than Social Security." Higher wage earners, however, "are relatively well off," Pozen said, and "most receive retirement income from 401(k) plans and IRAs in addition to Social Security benefits."

For those people earning between $25,000 and $113,000 annually during their careers, progressive indexing would combine wage index and pricing index adjustments.

"Progressive indexing provides a fair and workable foundation for legislative efforts aimed at improving the solvency of the Social Security system," Pozen told the panel. "Progressive indexing is flexible with regard to the date it is implemented and the date it is stopped. Moreover, progressive indexing can be combined with various forms of political sweeteners to make a viable legislative package." Pozen added that his plan slows the growth of benefits and protects low-wage workers.

But not everyone is sold on the Pozen plan.

Sen. Max Baucus (D-Mont.) said progressive indexing would demand deep benefit cuts. In his opening remarks to the panel, Baucus called it neither a "compromise," nor "progressive." He cited analysis from the Center on Budget and Policy Priorities, a non-partisan public policy watchdog for lower-wage earners, which indicates that someone who earns $36,000 today retiring in 2055 would face a 21% reduction in benefits. A person earning $59,000 today would face a 31% benefit cut.

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