I had wanted to respond to this thread immediately, but I was caught up, quite literally, in the Ward Churchill thread. EWU had invited him to speak here in April, but after Hamilton College, our President dis-invited him, our faculty Senate voted unanimously to re-invite him, Bill O'Reilly targeted the leadership of the Senate and we have all been dealing with multiple death threats each day. No that the threats are becoming old hat, I can get back to Social Security.
At the risk of entering the discussion after all interest has past, I will offer an explanation of what the shift from "wage indexing" to "price indexing" that Bush is proposing means. For those who don't want to plow thru the long version, the short version is that it has absolutely nothing to do with changing an "index" and everything to do with an outright cut in benefits. It is being dressed up as an "index" problem to try to hide what is going on. The end result is a reduction in benefits of about 54 percent fro a worker who is 20 today and will retire at age 70.
To see how this works, we need to work backward from private sector pensions to Social Security (which is always the best place to start when analyzing Social Security).
Lets start with the BEST POSSIBLE defined benefit pension, on that is index for inflation. At retirement the benefit will be: B = a * Wf * S, the final wage times the years of service times a "generosity factor." What this does is to peg the benefit to the final level of productivity reached by the worker. If the benefit is indexed for inflation, the benefit will not erode with inflation, BUT as the standard of living of the rest of the population rises with productivity, the standard of living of the retiree will slowly fall further and further behind. So in the best possible scenario, retirees fall behind the rest of society.
If this pension is not indexed for inflation, then as prices rise, the retiree's real standard of living will actually fall below what it was in the year they retired. This is true of the majority of private sector defined benefit pensions today.
Social Security benefits are calculated the same way, but instead of using the final year's wage, it uses an average of the wage over the highest 35 years of the working life! As a result, the retiree starts out at a standard of living that reflects the average standard of living over the past 35 years. This is why Social Security benefits by themselves cannot provide a decent retirement, even for higher wage workers. The only good thing is that this low level of benefits will not erode with inflation, but it will fall further behind as the average standard of living rises.
So we now finally get to the issue of the "Wage index" vs the "price index". We compare the buying power of the benefit based on actually wages with the buying power of the dollar based on the CPI. Since real wages tend to rise with productivity, the benefit will tend to be higher than the CPI. The difference is the productivity index. What Bush is proposing is that once the benefit is calculated, using the actually wages the worker received, the benefit will then be reduced by the productivity index.
If a worker saw their real wages rise at exactly the average rate of real wage increase, this process would freeze their standard of living in retirement at the same level they had IN THE VERY FIRST JOB THEY TOOK AT 20 YEARS OF AGE!! If their wages grew slower than average, their standard of living would be reduced below that amount.
So the bottom line is, something that is made to sound like an innocuous change in the index used, would utterly destroy the ability of Social Security to provide even the most basic level of retirement benefits.
At 08:02 PM 2/14/2005, you wrote:
There is a wage index used -- don't ask me how it's calculated -- and only for a few years in the late 70s did it rise more slowly than prices. There is no dispute that a switch to price indexing would mean an enormous benefit cut.
mbs
There has been a big brohaha lately about the Bushit proposal to change the indexing of social security benefits, from indexing them to wages (the present system) to indexing them to prices. There seems to be universal agreement, both among people who are for the change and people who are against it, that this will lower benefits, because wages rise faster than inflation.
But if real wages have fallen over the last 30 years, doesn't that mean by definition that prices rose faster than wages -- and that if benefits had been pegged to prices, the last 30 years, they would have risen faster too?
Michael
