SSI – Indexing Choices & the True Costs

From: Running on Empty by Pete Peterson

· When looking at the policy implications surrounding reform off SSI, here is a proposal made by Pete Peterson.

I like the idea a lot, & think it should be seriously considered…ram

"One feature of Social Security that few people understand, including some officials high up in government, is that it promises ever higher benefits to each new generation of retirees. The reason is simple. Under Social Security's benefit formula, your pension is calculated as a percentage of your lifetime earnings; but these earnings are indexed to the average earnings or wages of all workers in the year you reach age sixty-two. Since wages over time tend to grow faster than inflation, each generation receives pensions that have more and more purchasing power.

Here's an example of how it works. A full-time average-wage worker retiring in 2001 received an initial monthly benefit of $1,051. But by 2031 a full-time average-wage worker will be entitled, under current law and projections, to a benefit of nearly $1,460 in today’s dollars---in other words, a benefit worth 39 percent overall- pushing wage-indexed' benefits up by the same amount. Wage-indexing explains why it's impossible to 'grow our way out of Social Security's long-term deficit even if we faced no demographic pressure. Since benefit levels rise in tandem with wages and productivity, faster GDP growth simply translates into faster total benefit growth.

Wage-indexing was not always part of Social Security. For many years after the program began operation, the benefit formula was not indexed to anything. Congress adjusted it every few years as it liked. As we have seen, these ad hoc benefit hikes got out of hand in the late 1960s and went haywire after the Social Security expansion of 1972. In 1977 Congress instituted wage-indexing to set new benefits. And it's been wage-indexing ever since. This, in combination with yearly 100 percent cola adjustments for benefits already awarded, means that Social Security benefits become continually more generous even as the relative number of workers available to pay these benefits declines.

Did we have to take this course? Not at all. In fact, just a couple of years after Congress opted for wage-indexing, Prime Minister Margaret Thatcher came face to face with a similar crisis in the British national pension system. As part of her solution, which was later endorsed by Laborites as well as Conservatives, she chose price-indexing instead of wage-indexing to set new benefits. The outcome of this tale of two countries is quickly told. In the United States, projections of insolvency continue to plague Social Security's future. In Britain, sustainability has been totally achieved. Britain's pay-as-you-go pension costs show zero projected growth as a share of worker payroll or GDP a positive fiscal prospect.

Later as is actuarially sound larger real-benefit amounts could be granted."

Pete Peterson from "Running on Empty"