WASHINGTON -- As members of Congress begin mulling options to close Social Security's funding gap over the next 75 years, one fix they are considering would change the way Social Security benefits are calculated, slowing their growth over time by linking them to the rise in prices instead of the rise in wages.

		Fixing Social Security This is the first of an occasional series that will take a close look at the pros, cons and politics of individual proposals for Social Security, and the extent to which each might contribute to resolving the system's long-term financial problems.

This single change would eliminate the program's entire $3.7 trillion shortfall, but it would gradually and considerably reduce the amount future retirees receive from Social Security. Social Security would replace a smaller and smaller percentage of worker's pre-retirement income.

Today, Social Security checks replace about 42 percent of what a worker makes, on average, during a career. Changing the cost of living calculation to reflect growth in prices -- which grow more slowly than wages -- would mean the average retiree in 2042 would get a Social Security check that made up for only 23 percent of their pre- retirement income. That percentage would continue to decline over time.

Proponents of the change note that the Social Security system cannot produce its scheduled payouts under its current structure. As the baby-boom generation retires, fewer workers will be paying taxes into the system and by 2018, the amount being paid out of the Social Security system for retirees will exceed the tax revenues coming in. At that point, the government will begin dipping into the system's trust fund, which would be exhausted in 2042.

At that point the system could pay 70 percent of benefits scheduled. Congress will also face the difficulty of replenishing the money in the Social Security trust fund, which is currently being borrowed to pay for other government programs.

The wage-to-price change -- which has been put forward by a number of lawmakers and recently was mentioned in a memo leaked from the White House -- would peg future retirees' payouts to inflation, meaning workers could buy the same basket of goods and services that retirees can afford today.

But it also would mean that while the next generation of workers grows richer because of gains in productivity and technology, the Social Security benefits retirees receive would remain the same in real dollars as those of current retirees.

"Because of productivity growth, workers in the future will be earning much more," said Jagadeesh Gokhale, an economist and senior fellow at the Cato Institute, a libertarian think tank in Washington. "If you used the wage indexing formulas, as you do today, then retirees' living standard would reflect that growth in productivity, and their living standard would grow commensurately with the living standard of workers. But if you use a price indexing formula, 50 years from now retirees' living standards would not increase compared to today."

David Kamin, a research assistant at the liberal Center for Budget and Policy Priorities in Washington, put it this way: "You won't be able to afford the better car, or the increased housing prices that almost assuredly will be there in the future. You would only be able to buy the same amount of stuff that people currently on Social Security are paying for."

	Graphic: The power of indexing

Kamin said changing the cost-of-living formula could create a steep drop in the standard of living for lower-income Americans who rely on Social Security for a large proportion of their retirement income.

"I don't think we want to have a whole segment of the U.S. population stuck, in terms of their standard of living, back in the past," Kamin said. "If they had done price indexing since 1950, retirees would still be living at the standard of living in the 1950s. And that doesn't seem right; it's certainly not what the Social Security system was meant to do."

For this reason, switching to the price indexing system could be politically difficult unless it is accompanied by other changes that would offset cuts in benefits. Some have suggested the creation of personal Social Security investment accounts as the matching component.

Most Democrats argue that cuts in guaranteed Social Security benefits of that scale are simply unacceptable.

The White House reportedly was considering the change to price indexing earlier this year, and it was an option that President Bush's 2001 Commission to Strengthen Social Security put forward in combination with the creation of personal retirement accounts. But since then, President Bush has distanced himself from any one fix for the system's solvency issues and repeatedly has said he is open to all ideas, with the exception of increasing payroll taxes.

Sen. Lindsey Graham, R-S.C., introduced the switch to price indexing for benefits as part of a Social Security overhaul plan that he introduced in 2003. But when asked about it last week, he said his colleagues had convinced him to modify that part of his proposal so that it would be "very sensitive to low- and moderate-income people."

After consulting with Federal Reserve Chairman Alan Greenspan, Graham said he was working on a way to continue to calculate Social Security benefits for workers earning $30,000 or less on the basis of wage growth while using the consumer price index to calculate benefit increases for workers above that income threshold.

Graham said he was still waiting for estimates of cost savings under that scenario.

"The fundamental changes necessary to put Social Security on sound footing are difficult," Graham said. The two-tiered system, he said, would give lower income "workers the most aggressive form of benefit growth. They need the money the most."

But such a modification still would not pass muster with some Democrats or interest groups, including AARP (formerly the American Association of Retired Persons), who believe a two-tiered system eventually would turn Social Security into an anti-poverty program.

"If you start means-testing the benefit," said Fred Griesbach, director of AARP's Pennsylvania chapter, "do you then start to turn this into, not a social insurance program, but a welfare program? We do not want to do that. ...That changes the perception of the program in Americans' minds."

The result, he suggested, would be an erosion of political support to maintain Social Security.

Today, when workers decide to retire, the initial amount they receive from Social Security is calculated to ensure they receive a certain percentage of the income they made while working.

That percentage varies depending on income. Social Security pays America's lowest earners, those making up to $15,750, about 50 percent of what they were making. Higher earners who made $90,000, on average, (and were paying the maximum in payroll taxes) might get about 30 percent. The age at which a worker retires is also built into the calculation.

When agency officials set the initial benefit, they look at a person's annual salary over a lifetime. They adjust the earnings to reflect the rate at which wages for all American workers grew over that time, with the aim of having benefits keep growing at a similar rate so that retirees continue to enjoy a similar improvement in their standard of living.

Officials then take an average of the 35 highest-earning years and plug that figure into a complicated formula that essentially ensures that workers, on average, get about 40 percent of pre-retirement income. It is that complicated formula that would be altered if lawmakers decided to move to a price indexing system.

For more information about how Social Security benefits are calculated, go to: www.ssa.gov/OACT/COLA/Benefits.html.