The Price of Price-Indexing

No one has spoken much about President Bush’s other proposed reforms to Social Security, particularly changing the formula by which benefits are calculated. And when President Bush tries to address the suggestion, it comes out something like this:

“Does that make any sense to you? It’s kind of muddled. Look, there’s a series of things that cause the — like, for example, benefits are calculated based upon the increase of wages, as opposed to the increase of prices. Some have suggested that we calculate — the benefits will rise based upon inflation, as opposed to wage increases. There is a reform that would help solve the red if that were put into effect. In other words, how fast benefits grow, how fast the promised benefits grow, if those — if that growth is affected, it will help on the red.”

Still don’t get it? Right now, Social Security benefits are calculated through what is called “wage-indexing,” which adjusts a worker’s earnings based on wage growth during the worker’s lifetime. President Bush is proposing switching to a “price-indexing” formula, which essentially adjusts earnings based on inflation. That means huge benefit cuts since wages always increase faster than prices. For example, if today’s retirees benefits were calculated using price-indexing their benefits would be cut by 60 percent. And the picture for future retirees doesn’t look much better.

For the sake of future generations, we need to call attention to all the questionable parts of President Bush’s Social Security overhaul, not just to private accounts.