On January 4, the Washington Post reported that a "former senior administration official who recently discussed Social Security strategy with Bush aides said the change [from a wage to a price] indexing formula 'is assumed to be a part of any final solution.'"

"Price indexation" is the way in which the administration plans to cut the cost of Social Security. Its central mechanism is very easy to explain: it will cut promised benefits relative to the prevailing standard of living more and more every year.

What is surprising is just how drastic those cuts will be. Here is the kicker. Even if the trust funds are allowed to run dry in 2042, as the Trustees predict, or in 2053 as the Congressional Budget Office (CBO) predicts, and benefits were then cut to match payroll tax income, every worker today would still get higher guaranteed benefits under the existing Social Security system, even when crippled, than under the "price indexing" system. This is illustrated below.



Source: "Do Nothing" from Social Security Trustees 2004 report Table IV.B1 and from CBO "Long Term Analysis of Plan 2 of the President's Commission to Strengthen Social Security," Table 1B; "Price Indexation" from SS Chief Actuary, as reported in the Washington Post. (Some intermediate numbers interpolated.)

The light line shows what would happen to benefits if, as the trustees forecast, the trust funds were to be exhausted in 2042. Full benefits would be paid through 2041, and then benefits would fall to about 75 percent of promised levels, losing a bit more in subsequent decades. The dotted line illustrates the CBO's projection with full benefits paid through 2052 and then falling to about 80 percent of promised levels.

The dark line shows what retirees would get with price indexation. Benefits would fall relative to today's promises, gradually but forever. In 2042, benefits under price indexation would be similar to benefits under the Trustees' "do nothing" scenario, but every other year price indexation would leave retirees worse off. According to CBO projections, price indexation would leave retirees substantially worse off than doing nothing every year.

These lines show guaranteed benefits under Social Security. If retirees have private accounts, these also would contribute to their income. But the contribution of private accounts can be ignored. "Price indexation" would apply to all Social Security recipients, whether or not they opted for private accounts. Those who chose private accounts would face additional, even greater reductions in guaranteed benefits. On top of that, according to the CBO, the risk-corrected value of private accounts would barely exceed the guaranteed benefits they replace. Private accounts have essentially no effect on the picture above.

The former senior administration official chose his words well. The administration's "final solution" is to let Social Security's income guarantee bleed to death.

Bernard Wasow is a senior fellow at The Century Foundation.