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Saturday, May 07, 2005

Hubbard to Krugman: Pozen Proposal is Not a Gut Punch to the Middle Class

In a letter to the editor of the NY Times, Al Hubbard, director of the president's National Economic Council, states:

Saving Social Security, May 7, 2005

To the Editor:

I disagree with "A Gut Punch to the Middle," by Paul Krugman (column, May 2). … ... in a 1996 Op-Ed ... He then said: "Unfortunately, everything that a responsible government should be doing now - raising taxes, raising the retirement age, scaling back benefits for those who can manage without them (that means for the affluent, not the poor) - is political poison."

President Bush has now proposed slowing benefit growth for the affluent, not the poor, the idea Mr. Krugman complimented in 1996 while suggesting that no leader would be courageous enough to pursue it. But in his May 2 column, he called the president's proposal "a plan to slash middle-class benefits" and "a gut punch to the middle class."

Robert C. Pozen … has a plan that the president believes could be a model for reform. Benefits for the very highest earning workers - fewer than 1 percent - would grow no faster than inflation. Lower-income workers would receive the fastest benefit growth of all. And everyone would receive greater benefits than today's retirees.

Don't forget proposed voluntary personal accounts. With them, most low-wage workers could expect to receive higher benefits than even the promises the current system makes, and significantly more than what it can actually pay.

First, Krugman is talking about the affluent. The Pozen plan affects the middle class. As Brad DeLong has noted, under the Pozen plan:

…Now let's look at Pozen's numbers for those retiring in 2075. Pozen would keep the replacement rate at 49 percent for the working poor—those making half the average income. But the replacement rate for those making more would be cut: At the average income, the replacement rate would go from 36 percent to 26 percent; at one-and-a-half times average, from 30 percent to 17 percent; at the Social Security maximum, from 24 percent to 12 percent. .... These are ferocious benefit cuts for those at or above average incomes…

Hubbard argues the president has "...proposed slowing benefit growth for the affluent, not the poor...". Note that only those making $18,000 a year or less are unaffected by the proposal. The “affluent,” those making the average income of $36,000, have benefits cut from 36% to 26% of their pre-retirement income, and the cuts get larger as income rises. For example, at $54,000 benefits fall from 30% to 17%. In addition, as Krugman notes in his column, "Someone earning the equivalent of $1 million today would see benefit cuts equal to only 1 percent of pre-retirement income. ... a fleabite for the truly wealthy." That is a gut punch to the middle class just as Krugman described.

Next, while it’s true that everyone will see benefit growth, the rate of growth will be cut and the growth of benefits will not keep up with changes in the standard of living. Playing word games in this debate is not helpful and that’s what the statement “everyone would receive greater benefits than today's retirees” is. They won't receive greater benefits relative to what's currently promised and relative to changes in the standard of living over time. And the middle class is certainly not left harmless under the proposal.

Finally, he asserts that personal accounts will mean higher benefits for the poor than under the current system. I hope the poor don't count on the free lunch he’s promising.

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