SOCIAL SECURITY AND PROGRESSIVE INDEXING
July 11, 2005
Social Security benefits for all new retirees are determined by averaging a worker's 35 highest-earning years and putting his or her average wage through a benefit formula. Since the purchasing power of a dollar earned 35 years ago is not equal to the purchasing power of today's dollars, the worker's earnings are adjusted, or indexed, to the annual increase in average wages nationwide. Given that wages typically rise faster than prices, the real purchasing power of the average Social Security benefit paid to new retirees will increase more than 60 percent over the next 50 years.
Unfortunately, under current law, Social Security cannot afford to pay what is scheduled. Robert Pozen, a member of President Bush's 2001 Commission to Strengthen Social Security, has proposed progressive indexing as part of a reform that results in a sustainable program in the long run.
Under the Pozen approach:
- Benefit calculations would not change for current retirees, near retirees, or income earners in the bottom 30 percent (about $25,000 a year or less); these workers would receive the same Social Security benefits scheduled under current law.
- However, starting in 2012, initial benefits for the highest earners would be determined by the growth in prices, rather than wages.
- The growth each year in initial benefits for workers between $25,000 and the maximum would be set by a progressive mix of prices and wages.
Thus, with progressive price indexing, Social Security benefits for the highest earners would not receive the additional boost from real wage growth, but the Social Security benefits of lower earning workers would be the same as those currently scheduled, say National Center for Policy Analysis Senior Fellows Andrew J. Rettenmaier and Thomas R. Saving. The Bush administration's framework combines progressive indexing with personal retirement accounts to supplement the revised Social Security benefits.
Source: Andrew J. Rettenmaier and Thomas R. Saving, "Social Security and Progressive Indexing," National Center for Policy Analysis, Brief Analysis No. 520, July 13, 2005.
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