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Social Security News
A Simple Fix for Social Security Problems Proposed
by Think Tank Scholar
Most know benefits increase with inflation but not
that first year pay is determined by wages, which suggests the solution
  Nov. 9, 2007 – Everyone thinks Social Security
benefits are increasing by 2.3 percent next year – the recent rate of
inflation – but that is only partially true. It’s true for senior
citizens already in the program but the new class joining Social
Security 2008 will be getting 4.6 percent more than the incoming class
of 2007. That’s based on the percentage increase in the Average Wage
Index. Here lies the “Simple Fix for Social Security,” according to Alan
D. Viard, a scholar at the American Enterprise Institute.
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“It's no secret that Social Security benefits and
taxes are out of balance in the long run. For now, though, most
politicians are steering clear of the infamous "third rail," afraid that
offering a solution would end their political careers,” writes Viard in
an analysis appearing at Forbes.com and the AEI Website.
“But public reaction to a recent announcement by
the Social Security Administration suggests there may be a simple
solution right under our noses.”
The 2.3 percent increase announced for Social
Security grabbed the headlines but Viard says “Social Security payouts
are actually growing at double the pace reported in the headlines.”
“That suggests a simple way to bring the program's
costs under control--just lower actual benefit growth to the rate
everyone thinks it's already at.”
Although for those on Social Security the annual
rate increase by the rate of inflation, Viard says the “long-run growth”
of the program, however, is more dependent on that big boost in what is
paid each year’s new class, which is based on the faster climbing wage
base, rather than prices.
Viard points out, “Over the last 10 years, the wage
index has risen 49%, while prices have gone up only 29%.”
Another part of the problem he says is that there
are only three workers today to support each person on Social Security
but there will be only two by 2050, as baby boomers well the retirement
ranks.
“The problem with the current benefit adjustment is
that it's one-sided. Benefits rise as wages rise, but don't shrink as
the worker-retiree ratio falls,” he writes.
“Rising wages lead to more generous promises, even
as worsening demographics make it harder to fulfill them. The promised
benefit growth can't be sustained by today's tax rates.”
He proposes, “One solution would be to keep the
wage adjustment, but to add an adjustment for changes in life
expectancy, as Germany and Sweden already do.”
But he sees a better idea.
“Since nobody realizes that starting benefits are
being adjusted for wages, why not drop that adjustment for future
retirees? That one simple step would wipe out the program's long-run
imbalance without any tax increases. Over time, Social Security would
become a steadily smaller part of workers' retirement planning, allowing
a larger role for private savings.”
Read the complete analysis at AEI –
Click Here or at
Forbes.com
About Alan Viard
Prior to joining American Enterprise Institute (AEI),
Alan Viard was a senior economist at the Federal Reserve Bank of Dallas
and an assistant professor of economics at Ohio State University. He has
also worked for the Treasury Department’s Office of Tax Analysis, the
White House’s Council of Economic Advisers, and the Joint Committee on
Taxation of the U.S. Congress. Viard is also a frequent contributor to
AEI's
Tax Policy Outlook.
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