Recently, the issue of which estimate of the consumer price index (CPI) should be used to increase retiree’s benefits has come up for discussion as a way to lower benefits without actually admitting that benefits were being lowered. Robert J. Shiller provided an interesting perspective on Social Security benefits indexing in an article in the New York Times.
Shiller makes the argument that tying benefits to a CPI is misguided because the CPI has little direct correlation with the availability of revenue to support the increase in benefits. Instead, he recommends an index correlated with changes in per-capita GDP. Such a change makes sense, but not necessarily for the reasons Shiller presents.
Shiller believes it is necessary that this concept of ‘intergenerational sharing" be incorporated into the social safety net.
Whether or not the concept of "family" that affects intergenerational interactions in private life is a suitable analogy for society-wide interactions is arguable. The notion that all generations should suffer together is also on shaky ground. Shiller’s argument would be more compelling if formulated as "all society should benefit or suffer as the good times come and go."
Shiller provides critical data that would provide a more compelling basis for the GDP-based benefits index. It resides in a response to growing income inequality.
When social Security was last modified in the 1980s, it could not have been anticipated that wages, in real dollars, would fall for many people—and particularly for those most dependent on Social Security benefits for retirement income. Social Security revenue and benefits depend on wages; falling wages contribute to the anticipated revenue shortfall and produce reduced retirement benefits..
Wages and the level of economic activity have lost their correlation. Wealth continues to be crated, but the distribution of that wealth has changed—to the detriment of those who depend most on Social Security.
Shiller is correct in asserting that benefits should be managed in a manner that makes sense to society as a whole. What makes sense is to take the opportunity to help retirees recover some of the ground lost as the business community has relentlessly sought to lower wages and eliminate jobs in order to maximize profits.
Instead of creating a society that "shares the pain," why not take a step towards a society that keeps its promises. In our capitalist society one is expected to earn an income sufficient to support oneself. It is society’s responsibility to provide the opportunities to accomplish that. It is also society’s responsibility to provide sufficient retirement income to maintain a life of dignity as a senior citizen. When we say we cannot afford to keep our promises, we are really saying that we are not willing to pay the price. We can afford it.
Robert J. Shiller is Sterling Professor of Economics at Yale.