Social Security Indexing: FYI

There are quite a few aricles today on indexing and Social Security. For example, there is this one from Wirde News, this one from the International Herald Tribune, and this one from the Washington Times. In all of them, but the International Herald Tribune there is a complete failure to describe accurately the types of cuts Bush is proposing.

Most importantly, there will be no cuts to the benefits of current recipients based on model two of the President’s Commission to Strengthen Social Security. Anybody who claims otherwise is being extremely dishonest. Second, annual cost of living adjustments to current benefits are not indexed to wages, but to the CPI-W. What is indexed to wages is the PIA (Primary Insurance Amount). The PIA is determined by the workers wage history, wage growth, and the bend points in the PIA formula (for more on this see here and here). It is the later, the PIA, that will be indexed to the CPI-W. To achieve this the bend points would be reduced by the real wage growth rate.

Would such a modification to the calculation of the PIA reduce benefits in the future? Yes. It is scheduled (assuming the President’s plan is implemented, a somewhat big if given that members of his own party are now getting cold feet), to start in 2009. To partially offset this reduction are the private accounts. Participation in private accounts would be voluntary, and it would entail some risk. To read more about the President’s preferred model (at this time) go here.

Another excellent source of information on Social Security is the Dead Parrot Society.

FILED UNDER: Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.