My view starts with a fact that few liberals or conservatives know.   Under current law, each succeeding generation is promised larger benefits than the one that went before.  The reason is simple.  Under Social Security’s current benefit formulas, your pension is calculated as a percentage of your lifetime earnings.  Since over time wages tend to grow faster than inflation, the effect is that each generation winds up with pensions that have more and more purchasing power.
Here’s an example of how this works.  According to the Congressional Budget Office, a full-time average-wage worker retiring in 2001 received an initial benefit of $1,051.  But by 2030, a full-time average-wage worker will be entitled, under current law, to a benefit with some 30 percent more purchasing power, and possibly more. That’s because, even if real wages (wages in excess of inflation) grow by little more than 1 percent per year over the next generation, this will result in future retirees having much higher lifetime earning, and therefore much higher Social security benefits.

This feature of Social Security explains why the system still produces deficits under even the sunniest of economic assumptions.   Fix it, and the deficits disappear.  

 Since polls show most young people don’t think they will get any Social Security, there should be a viable political bargain that says,  “you’ll get benefits with exactly the same purchasing power of those that your parents got, and without paying more taxes.”  True, indexing initial benefits to inflation rather than wages, as I’m proposing, would result in Social Security replacing a smaller share of income in retirement. But that’s the price of fiscal responsibity.  Moreover, individuals can overcome it by saving more, which shouldn’t be all that difficult if, as anticipated, real wages rise from generation to generation.  Unfortunately, Bill Clinton was the man to make that argument, and would have, except that he got himself impeached instead and had to go running to the Neolithic Left.

Will indexing initial Social Security benefits to inflation save the system in perpetuity?

All bets are off if the U.S. birthrates converge with those of all other industrialized nations at well below replacement levels.   I think that day is coming, and that to fix it, Social Security will eventually have to pay benefits to parents as generous as those it pays to grandparents.  And all bets are also off if we don’t get control of the healthcare system, which is a far greater threat to the future than Social Security.   But such reforms would be extremely difficult to achieve.  Promising today’s young people they get the same real benefits in retirement as their parents do, by comparison, should not be all that hard to achieve.

Phil Longman
Senior Fellow
New America Foundation
Author: The Empty Cradle: How Falling Birthrates Threaten World Prosperity (Basic Books, 2004)

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