Of course, no one can say for sure that a quarter century or a half century hence, Social Security won't be in the bad shape the president fears; and a case can be made for doing something now to forestall problems later. But what we do should be designed to meet needs as they develop.
Progressive indexation is not well designed to address future uncertainties. It would improve Social Security's fiscal solvency most when real wages were increasing rapidly. But under those circumstances the system would in all likelihood remain fully solvent without interference. When real wages were stagnating, progressive indexation would do nothing to improve Social Security's condition. But those are precisely the circumstances under which the system would face the greatest danger of insolvency.
In short, progressive indexation is a mechanism that would "work" when we didn't need it and wouldn't work when we needed it most.
Granted, there is a middle ground where progressive indexation could in theory have some modest effect. But here we need to revisit the issue of individual accounts, because combining them with progressive indexation would almost certainly drain money out of the system, exacerbating the solvency problem or even undermining Social Security altogether.
Some background: The president has argued that individuals would be able to get a better return on their retirement accounts than the government does. On this he is simply wrong: no private firm can compete with the Social Security Administration in the efficiency with which it has administered its funds. In other countries that have privatized their social-welfare systems, benefits have fallen—in Britain, according to one estimate, by as much as 40 percent—as year after year transaction costs eat up what workers have put away.
Social Security does seem to give lower returns than private investment, for four reasons. First, it is safer. Second, there is a hidden tax in the system for middle- and upper-income workers: their benefits are reduced to help ensure that the poorest Americans do not retire in poverty. Third, most of the standard calculations of Social Security's rate of return do not take into account the value of survivors' and disability benefits. Because more than a third of those who currently collect benefits are not retired workers (among them nearly 12 million spouses and children of retired, disabled, or deceased workers, and 6 million disabled workers), ignoring these benefits significantly lowers estimates of returns. And fourth, some of the contributions of today's workers are used to finance the retirement of previous generations—this is the nature of a partial pay-as-you-go system.
Already Social Security is being portrayed as a bad deal, although it is not, particularly when one takes into account that no private investment can, for instance, insure one against inflation. (Only recently has the government provided inflation-protected securities, and the returns on Social Security contributions do not look unfavorable in comparison to the returns on these securities.) If it is a bad deal for some, that is not because it is inefficient but because it is redistributive. Under progressive indexation the benefits per dollar contribution of all but the poorest would be cut, thus—to follow the logic—making Social Security an even worse deal for all but the poorest Americans. One calculation has shown that by 2045 the rate of return for a worker earning $58,400 would be cut by more than 50 percent.