Freezing social security benefits in real terms

by on January 6, 2005 at 5:37 am in Economics | Permalink

Wednesday I reported on the Bush Administration plan to check the growth of social security benefits.  To take an extreme version of the idea, what if nominal benefits rose with the price index rather than with the general level of wages?  Real benefits then would be constant rather than rising over time.

I see the following possible problems:

1. Perhaps the elderly face rates of price inflation (e.g., health care, personal servants) above and beyond the measured CPI.

2. It is unjust to keep our real contribution to the elderly constant over time.

3. The elderly will suffer a negative relative status effect.  Everyone else will have nanotechnology robots, but the elderly in 2075 will not.  They will be left behind.

4. The value of the social security program will grow small, in real terms, relative to the economy as a whole.

On #1, we should be willing to make all required differential adjustments (email me if you know a good source on rates of price inflation faced by the elderly, and yes it must adjust for changes in medical technology).  On #2, I will grant the point but dollars can be used to fight many injustices.  Rising real benefits, although "automatic" on today’s books, are in fact a new expenditure and should be evaluated as such.  It is unlikely that this is the best anti-poverty program we can devise.  Plus the elderly will enjoy a rising standard of living, over time, as the economy grows wealthier and they can save more when young.  #3 boils down to #2.  #4 is not a problem per se, if it results from growing riches.  And note that price indexing would not kick in until the more distant future.

The real issue, I suspect, boils down to medical care.  Many life-saving improvements are falling in price in real terms (what did a triple bypass cost in 1940? — infinity).  So we encounter more opportunities to prolong lives.  But if benefits are fixed in real terms, not all of these opportunities can be exploited.  That is, more people will use the new improvements, but constant benefit levels mean that access will be more differential than if real benefits would rise.  Are you prepared for this?

If you are a critic, here is the real problem.  The most important service for many of the elderly is health care.  Yet price indices are notoriously inaccurate and unjust when many prices are falling from levels of "infinity" to "very high."

The bottom line: I am ready to push the "yes button" on this change.  That being said, I would use the money to address our broader fiscal problems, and not to finance a transition to government-run personalized accounts.  As the economy grows, over time, we would in any case move toward a greater importance for private saving.  And if you wish, bundle the whole thing with greater means-testing.

Here is a good discussion on how social security indexing works and would work under possible reforms.  Here is further useful commentary.  Here is Matt Yglesias on tinkering with the retirement age, another good idea.  Russ Roberts offers general comments on the problem of social security, try Arnold Kling as well.  Brad DeLong lays down the party line.

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