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Friday, May 06, 2005

Some reasonable debate on SS reform

I would wager most people have no idea how their social security benefits are determined. I bet most people are probably unaware that Congress determines the formula (not the president!) and the formula can be changed whenever.

From this Joint Economic Committee Report:
Social Security benefits are quite progressive. When a worker turns 60, SSA averages his highest 35 years of earnings to determine a preliminary final benefit for retirement. Workers receive benefits equal to 90% of the first $7524 of average earnings. For the next $38,000 of earnings, workers receive only 32% back in benefits. Workers receive only 15% in benefits for any income above that, with a maximum benefit of $2,000 per person per month. Thus, the difference in benefits between high-wage and low-wage workers is much less than the difference in lifetime earnings.

The report goes on to discuss how SSA indexes SS benefits - using wage increases (which influence household budget constraints through increased income) rather than price increases (which shrink the household budget constraints). Rather than adjusting SS benefits over time to hold paritywith changing prices (implicitly assumed to always be positive), SS benefits are indexed according to how producitvity of the current workforce changes, as reflected in the current workforce's wages. There might be some demand-pull inflation (I am no macroeconomist, so I probably just used that term incorrectly), which will cause prices to increase after producitivity and wages, and hence deamand increases. However, retirees no longer increase their productivity and yet receive increases in SS benefits as if their (past) wages reflected the contemporaneous increase in productivity. Perhaps I misread the report but I think this is how it works. Perhaps this is fair in someone's book - junior is more productive, and earns more, and therefore we can afford to pay grandma more. Maybe I am missing something, which wouldn't be surprising to some.

Nevertheless, the article concludes:
A gradual implementation of blended indexation of initial benefits would solve roughly three-fourths Social Security's long-term deficit, according to Steve Goss, the chief actuary for the Social Security Administration. Combining the blending of wage and price indexation of initial benefits with a reform of the measure of inflation used to adjust existing benefits for the effects of inflation would come close to solving the entire 75 year funding gap.

I suppose we shouldn't wait for this to make it on the nightly news.

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