Social Security and the Indexing of Benefits

There are a number of minor tweaks to the Social Security system that would render it fiscally sound for the indefinite future without any decrease in promised benefits. These modifications would require some or all workers to pay more into the system. Consequently, any such changes are politically unpopular. 

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.

"The purpose of Social Security is to help families. It reinforces the intergenerational sharing that families already — though imperfectly — provide. It helps retirees by stabilizing their income, and it helps their grown children, who are relieved of any excessive burden of supporting them. This purpose strongly suggests that the Social Security benefits should be indexed to some measure of the available, aggregate economic pie. That means a formula that looks completely different from the ones being discussed today."

Shiller believes it is necessary that this concept of ‘intergenerational sharing" be incorporated into the social safety net.

"THE point of G.D.P. indexing is to align the interests of the retired with society as a whole. Older Americans should share both the windfalls and the losses with other generations — with working adults, and with children. It shouldn’t be otherwise. If the system’s rules force us to maintain the real benefits of retirees at all costs, we may find ourselves, in difficult times, taking excessively from our children via cuts in education, or from our working adults. Why should retired people feel no effect at all from the recession while younger people are left suffering? They should be sharing the hardships, if we have familial feelings for one another."

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.

"....in fact, since 1982, Social Security benefits as a fraction of G.D.P. have generally been falling, at least until the latest recession."

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.

"The fact is that per capita G.D.P., in current dollars, has grown 1.2 percent faster a year, on average, than the CPI-W in the last 20 years, despite the Great Recession. If we indexed Social Security benefits to G.D.P. per capita, and not to the C-CPI-U, people who retire today and live 20 additional years would get a third more in real, inflation-corrected benefits — provided, of course, that the next 20 years are like the last."

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.

"Achieving the right benefit formula while fixing Social Security’s solvency problem might require increasing the contribution rate — now in the form of 6.2 percent taxes on employees and employers. But so be it. We need to say what is right, keeping our eyes on the integrity of Social Security, which is crucial to our identity as a civil society."


Robert J. Shiller is Sterling Professor of Economics at Yale.