An Argument for Price Indexing as a Social Security Solution - moneywise.com
Many proposals to address the Social Security solvency problem have been floated to Congress over the past few years, but they always seem to come back to the need to add revenue (tax increases) or reduce benefits as the only viable way to deal with the issue. Or maybe a combination of the two would bring the program into long-term balance. But there may be a way to avoid the tax increase part of the approach through the use of a relatively simple adjustment known as “price indexing” incorporated into the benefit calculation formula. So says retirement expert Devin Carroll in a post on moneywise.com.
Price indexing sounds pretty complex, but in reality, it’s fundamental. As Carroll explains in his post and in the accompanying video, the current formula to calculate initial benefits (the benefit amount available at full retirement age) uses parameters that adjust yearly based on changes in the average wage index (AWI), while price inflation is used in subsequent years to determine the annual cost-of-living adjustment (COLA). The consumer price index (CPI) is used to determine COLA changes at a slower rate than the average price index. So, what would be the outcome of a change to use CPI rather than AWI to adjust initial benefit calculation parameters? According to Carroll, and based on a CATO Institute analysis, such a change “would close 80% of the program’s funding gap over the next 75 years, and in its 75th year, actually lead to a surplus.” Check out Carroll’s post here.
Like many consulting organizations, the Association of Mature American Citizens (AMAC) has been heavily engaged in developing a solution that would preserve and modernize Social Security for generations to come. This effort by AMAC and its subsidiaries, AMAC Action and AMAC Foundation, has resulted in AMAC’s Social Security Guarantee (SSG), a slate of adjustments across a range of target areas with an intent to preserve the program for current beneficiaries and to align it with 21st Century demographics and economics. One of the adjustments included in the AMAC SSG is that of progressive price indexing for initial benefits, the net effect of which would be a lowering of the initial benefit calculated for higher earners, primarily by moving more of their average earnings away from the first (90%) bend point to the bend points that generate lesser portions of the calculated benefit (the 32% and 15% portions). Learn more about the AMAC SSG by visiting the AMAC website.