Reforming Social Security: The Case for Progressive Price Indexing

p>In light of all of the worrying about sequestration, entitlement reform – of course – goes undiscussed.  While trimming around the edges of discretionary spending has sent people into a panic, the $100 billion in cuts are a drop in the bucket compared to the growing expenditures of the mandatory spending programs Social Security and Medicare.

In December NCPA senior fellows Andrew Rettenmaier, Thomas Saving and Texas A&M research scientist Liqun Liu published a study on the progressivity of Social Security benefits.  The Social Security system by design is progressive, meaning that retirement benefits will replace more of a low-income worker’s salary than they will a high-income worker’s salary.  However, according to Rettenmaier, Saving and Liu, this progressivity is somewhat diminished by the changing life expectancy (at age 65) of high-income and low-income men. Using county-level data, they find:

  • While life expectancy has increased for men since 1970, it has risen even faster for high-income earning men.
  • Between 1970 and 2009, life expectancy for men at the low end of the income distribution (10th percentile) rose 32 percent.
  • During the same period life expectancy for men at the high end of the income distribution (90th percentile) increased 43 percent.
  • Men in high-income counties live about 1.1 years longer than men in low-income counties.

Currently Social Security benefits are determined by a

worker’s highest earnings over 35 years and the growth of average wages.  Because wages generally rise faster than prices, however, a formula based on price growth may mitigate the differences in life expectancy with respect to benefit payouts and also reduce the cost of the program.  Low-income workers” benefits would be indexed by wages while high-income workers” benefits would be indexed by changes in

price level. This would help retain the progressivity of Social Security while reducing the growth in costs.

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Comments (7)

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  1. Neil says:

    This would help retain the progressivity of Social Security while reducing the growth in costs.

    — I am a big proponent to fixing the social security system. Perry got criticized for saying it, but he’s right. Social Security is a a ponzi scheme.

  2. Andrew O says:

    Social security hasn’t proven to be all that “secure” for retirees nor the most cost-effective as mentioned. I think the proposed formula with adjusted indexes by wages for the low-income and changes in price level for the higher-income could certainly prove to be more cost-efficient. Wonder how much serious consideration this will be given by policymakers in Washington.

  3. Kyle says:

    “When the income-related mortality estimates are used to calculate lifetime benefits” progressivity decreases. Progressivity is based only valid for men up to the findings of a 1939 Cohort Study. So the gains from longevity in higher income earning men easily outpaces equal longevity in low income earners, the progressivity starts to drop off.

    I fully agree that SS as it currently is, is a ponzi scheme. The findings would change that. Way to go A&M team.

  4. Gabriel Odom says:

    We could adjust SS benefits and minimum enrollment age by race and sex, just like the similar ideas for reforming Medicare. This way, we are helping those people who cannot physically earn a living any more, but not providing a perverse incentive for early retirement to individuals who are still able-bodied.

    For instance, since the life expectancy for an African-american male is roughly 67 years old, we leave the minimum enrollment age for SS benefits at 65. For a Caucasian woman however, the life expectancy is closer to 78 years old – meaning that the government is paying this person to spend the last 13 years of their life in a sedentary state. In fact, this otherwise able-bodied Caucasian woman is readily available to work (even part time), but is penalized for earning wages by the SS administration. This ought not to be. Either adjust the minimum age of enrollment for this woman to 75 years, or allow this woman to work without losing SS benefits.

  5. Hoover says:

    Why not adjust it by height. It’s been proven that taller people make more money. So at 18 we all get measured and then they adjust our social security contributions, so that we all contribute more equally.

  6. Jim says:

    Just a thought; I don’t care what nationality you are and I do not believe anyone owes me, however I started working when I was thirteen and soon after began paying SS taxes, upon doing so I was promised by the US Government; that if I did so, I could and would be allowed to use this “benefit” when I became 62 or older… I knew this going into that agreement and have honored my commitment by continuing to contribute/pay into social security all my life…

    Anyone who has paid taxes for the required number of years should be the ones allowed to reap the full fruits of their labor at the appropriate age; when they meet that requirement it should be guaranteed… If they choose to continue to work and are able to continue to work then good for them…The choice is theirs…but don’t mess with what thousands of honest hard working men and women in the USA were promised who have contributed their whole lives…(They have fulfilled their contractual agreement)

    Just another note: Both my mother and father died before they were able to begin collection of their benefits and like so many others, they too paid/contributed all of their working lives…

    Congress needs to live up to what was promised and not go back on their words; also it would be great if they would abide by the same laws we live by…

    Another thought to answer for the above statement; I agree with helping the helpless, they will always be with us, but find support for them by using the wasted moneys allocated from foolish government spending that we hear so much about…

  7. Alfred L. Kreps says:

    Those who have contributed the most and continue to have significant earned income have as much as $463.00 a month deducted from their ssn check plus pay income tax on 85% of the gross amount. In my case I net 57.5% of the gross after the deduction and payment of income tax. I believe that I am ENTITLED to what I pad for. Those who receive ssn funds having paid little are receiving welfare money. Entitlements are earned. As a result of putting money Ito the the fund. Welfare is gettig something’s in this case, money payed by another person. Finally, government is the worst at handling money because the handlers do not have a vested interest in the fund. They have a special and very costly fund paid by the taxpayers for their retirement. Preferred treatment for those who have government jobs, both elected and non elected.