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A kinder, gentler Social Security fix

LIKE A finalist in policy wonkery's equivalent of ''American Idol," Bay State investment guru Robert Pozen has found sudden fame as the whiz whose Social Security means-testing scheme has caught the White House's eye.

But hold on a minute, judges. There's another talented local contestant whose ideas warrant your attention, and that's MIT economist Peter Diamond. One of MIT's prestigious institute professors, Diamond, along with Brookings Institute senior fellow Peter Orszag, has put forward a public-pension overhaul idea that would avoid the larger cuts some other Social Security fixes spell for the middle class.

''We came to the conclusion that for the sake of political debate, it would be valuable to have a plan out there to draw a clear contrast with individual-account proposals," Diamond says.

The two have taken what is, in this day and age, a novel approach. They actually studied how Social Security's imbalance came about and tailored their repair to the actual problem.

To close the gap Social Security faces, they balance some gradual benefit reductions with some new revenues to bolster the system.

The basic bottom line for everyone in the Social Security debate is simple: How does it affect me?

For an idea, look at the contrasts between Pozen's so-called progressive indexation plan and the Diamond-Orszag proposal.

The Pozen plan would hold low-income workers -- those earning about $16,500 in today's dollars -- harmless. Under the Diamond-Orszag blueprint, however, minimum-wage workers 25 and older would actually see their retirement benefits increase.

For median-income workers -- those making about $36,500 -- the Diamond-Orszag plan imposes cuts, but they are considerably less than similar workers would face under Pozen. Their reductions would be less than a percent for anyone 45 or older. Upon retirement, a 35-year-old would lose 4.5 percent in (currently scheduled) yearly benefits, while a 25-year-old would see his Social Security payments trimmed by about 9 percent.

In contrast, under Pozen's plan, Social Security cuts reach 12 percent for a 35-year-old and 16 percent for someone in his or her mid-20s. And at levels the Boston-area would consider middle class, the differences would be greater still. Consider: Today's 35-year-old earning $58,400 would have his benefits reduced by 17 percent under Pozen, but only about half that -- 8.7 percent -- under Diamond-Orszag. Further, the reductions under Pozen's plan get bigger in the very long run.

What's more, as Diamond notes, Pozen's progressive indexing only closes about 70 percent of the long-term Social Security shortfall, which means that still more cuts -- or more revenue -- would be required. Their plan, by contrast, restores Social Security to stability.

Now, as Americans are increasingly learning, there is no free lunch when it comes to fixing Social Security, which means it's time for the castor oil.

Under the Diamond-Orszag plan, the Social Security tax would gradually increase from the current 12.40 percent to 14.18 percent in 2055. The current cap on the Social Security payroll tax would be raised from $90,000 to about $106,000, thereby moving back closer to the percentage of total income taxed under the bipartisan Social Security reform of 1983.

Earnings above that level would be subject to an additional 3 percent assessment.

Next, newly hired state and local workers would be brought into the Social Security system.

Some costs would also be pushed into the future, and the reasoning there is interesting: The Social Security system gave earlier generations far more in benefits than they had paid in; if it hadn't, Social Security would have some $11 trillion more in assets. But the expense of that beneficence should be borne over more generations, Diamond contends; thus they would impose a modest payroll-tax hike (included in the rise to 14.18 percent) beginning in 2003 to spread that cost.

As one alternative revenue source, the two suggest keeping a reformed estate tax and dedicating the proceeds to stabilizing Social Security. That alone would address 20 percent of the long-term Social Security deficit.

Their plan, first offered more than a year ago, isn't perfect, but what scheme is? Nor is it painless, politically or financially.

But it does offer a valuable second opinion. And what it demonstrates is this: With a balanced approach that includes both benefits cuts and new revenue, Social Security can be restored to good health -- and without the radical surgery others have recommended.

Scot Lehigh's e-mail address is

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