Certainly, some adjustment - more money or less spending - is needed. Here's what i've seen of the debate so far, from the Washington Post at
http://www.washingtonpost.com/wp-dyn/articles/A45726-2005Jan3.html:****************
"Currently, initial benefits are set by a complex formula that calculates workers' average annual earnings in their 35 highest-paid years and adjusts those earnings up from those years to reflect standards of living near that worker's retirement age. That adjustment is based on wage growth over that time span. Under the commission plan, the adjustment would be based instead on the rise of consumer prices.
The change would save trillions of dollars in scheduled expenditures and solve Social Security's long-term deficit, but at a cost. According to the Social Security Administration's chief actuary, a middle-class worker retiring in 2022 would see guaranteed benefits cut by 9.9 percent. By 2042, average monthly benefits for middle- and high-income workers would fall by more than a quarter. A retiree in 2075 would receive 54 percent of the benefit now promised."
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The question is whether this is a draconian cut or was the benefit formula set awry to begin with? Two opinions:
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"A person with average wages retiring at age 65 this year gets an annual benefit of about $14,000, but a similar person retiring in 2050 is scheduled to get over $20,000 in today's dollars," Mankiw said in a speech at the American Enterprise Institute. "In other words, even after adjusting for inflation, a typical person's benefits are scheduled to rise by over 40 percent."
Opponents of the proposal have also been mobilizing. Under an inflation-linked formula, benefits would keep up with prices, but wage levels determine standards of living, Rother said. Social Security benefits currently equal 42 percent of the earnings of an average worker retiring at 65. Under the new formula, that benefit would fall to 20 percent of pre-retirement earnings. Future retirees would, in effect, be consigned to today's standard of living.
"It's like saying elderly people today should live at a 1940 standard of living," said Robert Greenstein, executive director of the liberal Center for Budget and Policy Priorities. "Part of our social contract has been to allow seniors to participate in rising standards of living rather than consigning them to some second-class status in retirement."
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The CAP's summation (linked in original post):
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The "price indexing" plan, expected to be proposed by Bush, would make that adjustment based on the rise of consumer prices – essentially the inflation rate. Since wages rise much faster than inflation, that means your newly adjusted salary will be lower. The end result is far lower benefits for every new generation of retirees. If this system had been in place since Social Security's inception, people today would be retiring with a benefit tied to the living standard of the 1930s, when 40 percent of households lacked indoor plumbing.
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Previously, i've said that price indexing seems pretty reasonable, in that people are worried about the prices of things when they're retiring, not what other people are making. Some good points have been made, though, so to the re-examination we go.
Personally, this is all based on so many what-ifs that i find it hard to take the numbers seriously. It's like fudging numbers in speculative accounting. Beyond the assumptions about growth and demographics, this particular debate is based on the expected difference between wages and inflation. Suppose wages went up slower than inflation (especially given the dismal growth rate being projected by all these studies) - it seems to me people would be clamoring to switch to price-based rather than wage-based benefits. But anyway.
The CAP's summation seems to me somewhat unfair in their invocation of 30's outdoor plumbing. Not all increases in the standard of living are about rising costs - much of it is about improving technology. What we pay now for indoor plumbing is much, much less than the equivalent cost in the '30s. It seems like political speech makes everybody want to put their thumbs on the scale at least a bit. But anyway, they do have a point.
If the CPI is not keeping up with standards of living, then retirees will be stuck in a time warp. Nowadays, retirees want cable and internet (i certainly will!) but is that reflected in the CPI? On the other hand, is it necessarily the case that the standard of living keeps pace with wages? or isn't there usually some increase of discretionary income as part of that wage increase, an increase of optional spending? If so, Social Security would be paying out benefits not just to make sure retirees can be comfortably secure, but to hand out extra 'fun' spending money too.
The notion of cutting benefits 53% sounds horrendous. But how much of that is gutting the retirement and how much of it is paring excess? What if we're making SS twice as expensive as it needs to be? In that case, what i would advocate is cutting the SS tax by half, keeping SS as a minimum guaranteed retirement, and let people add on whatever retirement (or whatever else) they want with the other half they get to keep. But i doubt it's that simple. It does seem plausible that the cost of the standard of living may go up faster than inflation, if not as fast as wages.
My immediate reaction is to say we should go ahead and correle benefits with prices, on condition that the CPI be regularly reviewed and new items now considered to be part of the standard of living be added to it continuously. That is, try to make the CPI a measurement of the standard of living rather than a measure of inflation, or (more likely) create another measure to do that. The problem i see immediately to this is that this makes the determination of the standard of living a political football that could waver wildly by administration.
On the other hand, that's probably a political plus for democrats. People arguing over whether Granny can have cable or not.
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