Focusing on the Insolvency Problem: A Look at One of the Fundamental Drivers - The Debt Dispatch; AMAC
In this first part of a two-part study, American Enterprise Institute (AEI) senior fellow Andrew G. Biggs challenges one of the basic narratives associated with Social Security’s steadily eroding financial picture. Specifically, his article addresses the issue of wage indexing — the use of national average wage growth as the basis for initial benefit calculations. The implications are that the changes made via the 1977 Social Security Amendments locked benefit growth into autopilot, leading to a rate of benefit growth that has reached unsustainable levels.
Biggs’ article provides context to many of the reform proposals that have been submitted for evaluation by the Social Security Office of the Chief Actuary (OACT) over the years. Indeed, examine section B1 of the OACT’s Provisions Affecting Level of Monthly Benefits webpage, and you will see numerous proposals calling for progressive price indexing of initial benefits as at least a partial solution to the insolvency problem. In simple terms, the thought is to base calculation formula changes on consumer pricing changes rather than wage growth. Since prices tend to grow at a slower rate than wages, the formulas used in the initial benefit calculation would produce a lower result.
The points raised by Biggs in his article are fundamental and have been recognized by many as a viable consideration for correcting the Social Security benefit calculation for the future. The Association of Mature American Citizens, for example, has included this type of formula change in its Social Security Guarantee legislative framework proposal and recognized it as a significant contributor to addressing the shortfall cited in the latest Trustees Report.