December 23, 2013

Don't Worsen Social Security's Soaring Cost Problem

Charles Blahous

J. Fish and Lillian F. Smith Chair
Summary

Followers of politics may have noticed a recent push from the left to expand Social Security benefits above and beyond the current-law growth schedule (which itself remains unfinanced). Such an expansion has received support from moveon.org, Paul Krugman, and even from some sitting U.S. Senators. While expanding a popular program carries an obvious political utility, any reasonably careful analysis of Social Security reveals the idea to be highly problematic at best. Listed below are 10 factors to bear in mind whenever proposals to change Social Security benefits are discussed.

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Followers of politics may have noticed a recent push from the left to expand Social Security benefits above and beyond the current-law growth schedule (which itself remains unfinanced). Such an expansion has received support from moveon.org, Paul Krugman, and even from some sitting U.S. Senators. While expanding a popular program carries an obvious political utility, any reasonably careful analysis of Social Security reveals the idea to be highly problematic at best. Listed below are 10 factors to bear in mind whenever proposals to change Social Security benefits are discussed.

#1: On the positive side, these proposals acknowledge that the Social Security benefit formula should be changed. Historically, partisan advocates have too often fueled the misperception that any changes to Social Security benefits violate what Americans “paid for” based on the amount of their tax contributions. This is incorrect, as these latest proposals implicitly acknowledge. Over the years the program’s benefit formula has changed repeatedly; it does not even attempt to reflect the amounts each worker’s contributions have earned. Proof of this lies in the fact that scheduled Social Security benefits exceed the value of total worker contributions bytrillions of dollars. Thus, a review of Social Security’s benefit formula is a good thing; the question is what changes to it would treat participants more equitably.

#2: Social Security benefits are already increasing substantially under current law, and would continue to increase under various proposals to maintain solvency. The basic benefit formula is indexed to growth in the Average Wage Index (AWI), which tends over time to rise faster than price inflation. As a result, real per-capita Social Security benefits are already rising substantially under current law. Partisans sometimes apply the misleading terminology of “benefit cuts” to proposals to adjust benefit growth to sustainable rates, but the reality is that under virtually any plausible reform scenario, benefits will still rise in real terms relative to what seniors receive today.

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