The True Origin of Social Security’s Solvency Problem? -

Much has been written about Social Security’s impending 2022 trust fund depletion and the reduction in benefits that would be felt across the board when the reserves are gone. Most of the rhetoric over the past few years has focused on what to do about the problem, with battle lines being drawn over a number of competing reform proposals. But consensus, of course, seems to be that a “fix” to avoid a draconian cut in benefits will require a bit of both sides of the equation: increase revenue (taxes), or bring expenditures down (benefit reductions of varying nature).

No matter what corrective action is eventually taken, everyone knows there will be some degree of displeasure in virtually every population segment. That’s why the “problem” has remained unaddressed since it was first pointed out decades ago in the annual program trustees’ report to Congress. The political will has just not been there to tackle the necessary corrections.

All of the above is simply a condensation of media accounts on the Social Security funding crisis surfacing over the past few years. All eyes are on the projected trust fund depletion date, as well as on the ongoing debate on corrective measures. That’s important, of course, but it’s also good to reflect on why Social Security is facing this funding nightmare. In a post titled “The day the Social Security funding crisis became inevitable,” a trio of well-known authorities do just that, setting forth a hypothesis of the cumulative effects of a 1977 Congressional decision that paved the way for Social Security to reach its current unsustainable position.

The article, posted yesterday on and authored by American Enterprise Institute senior fellow Andrew G. Biggs and Hoover Institution at Stanford University officials John F. Cogan (senior fellow) and Daniel Heil (policy fellow) at the Hoover Institution at Stanford University, reflects on options considered by Congress in 1977 to “slow the rapid growth in benefits for future retirees.” This action was needed following the correction of a 1972 system flaw projected to create a funding crisis by 1979. The options considered were focused on the manner in which initial benefits were calculated, with one suggesting linking future benefit growth to inflation (price indexing), the other linking it to wage growth (wage indexing). Historically, wage growth has outpaced inflation, thus causing benefits to grow faster over time.

Congress adopted wage indexing as the driver in annually adjusting benefits. On the surface, it sounds like this technicality would not create a substantial difference over the long term; the Biggs/Cogan/Heil article suggests otherwise. By opting to adopt price indexing instead of wage indexing, they suggest, benefit levels today would be 12% lower (and, of course, the impact of COLAs would be lessened) and Social Security would be financially solvent.

In support of this theory, it’s interesting to note that several key Social Security reform proposals through the years–including the AMAC Social Security Guarantee proposal–have included a push to change the formula for calculating initial benefits so that it changes annually via inflation rather than through the national average wage index as is the current methodology. Some proposals would call for a universal change affecting all beneficiaries, while others suggest applying the change to higher-level earners as a way to partially resolve income disparity. Either way, the point is that once set, the overall payout from Social Security would be lessened over time.

For the complete Biggs/Cogan/Heil article, click here.

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