Coming soon from Obama's deficit commission: Social Security reform?

A second reform, bolder and more controversial, would means-test Social Security, gradually slowing the growth of benefits for the more affluent but sparing those with lower incomes. The model for this is the Pozen plan, the brainchild of Robert Pozen, a former vice president of Fidelity Investments and influential Social Security reformer.

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The Pozen strategy would utilize a formula called “progressive indexing.” Future retirees with higher incomes would see their benefits rise less than under the current formula, those with low incomes would continue to get full increases, and the benefits of those with middle incomes would rise according to a sliding scale. Current Medicare recipients would not be affected.

No one, not even those with high wages in the years on which their Social Security benefits are calculated, would face an actual reduction. Under the Pozen plan, higher income workers would have increases in their benefits based on inflation, while those with low incomes would continue to have theirs based on the more generous index of wages.

The great attraction of the Pozen plan is that it would erase more than two-thirds of Social Security’s long-term shortfall of $4 trillion. (The 2010 shortfall is $29 billion.) The downside is that many Democrats opposed the plan when President Bush endorsed a version of it in 2005 when he was promoting broad reform of Social Security.

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