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Wage Indexing Column

The latest from me in which I defend the right of yours truly and other members of Generation Y (and Z, and whatever comes after that -- maybe we can use Hebrew letters like when discussing infinite sets) are entitled to the futuristic goods and services that only the wage-indexing of Social Security benefits can provide.

January 11, 2005 | Permalink

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» CPI indexing... like taking money from a baby from Craig's Thoughts, Theories, and Tantrums
If you haven't noticed, I really like Matt Yglesias's views on things. In his newest article on TAP. He explains how changing the mechanism of increasing social security to Consumer Price indexing will simply decrease the benefits my, and future,... [Read More]

Tracked on Jan 11, 2005 5:04:11 PM

Comments

Reality based... I was looking for your comments on the CBS thing...

Posted by: wizard61 | Jan 11, 2005 3:19:31 PM

You seem to have a profound misunderstanding about how the CPI works. You should realize that the Consumer Price Index basket of goods does not remain constant over all the time it charts. For instance telephone access appears, as does cable access and airfare access. Your argument turns on the purchase of new items which are in fact reflected in the CPI basket of goods.

Posted by: Sebastian Holsclaw | Jan 11, 2005 3:24:39 PM

Matt, I understand the substance of your argument, but it hardly answers the basic question of how you or I or anyone else of our generation can straight-facedly argue we're currently entitled to anything on the futuristic goods front. After all, we've spent the vast majority of our lives leaching off the productivity of our parents, and, in most cases lest priviledged than your own, public funds that allowed us to attend school and fund our higher education, not to mention various tax subsidies and the like that incentivized and subsidized our parents to raise us. At the beginning of our careers or still in graduate school and continuing to leach away, we've hardly paid off enough of that debt or made any kind of significant contribution to society to argue we're entitled to anything more from government or past and future generations.

I have some sympathy to the claims of those from disadvantaged backgrounds who started off behind anyway, but as far as you and I are concerned, if the rules change today, before we've made any contribution to deserve something, we, as rational people, have ample time to adjust our life choices accordingly. It's fine for us to argue and advocate for policies that will better provide for us in the future, but to pretend that's defending a sacred obligation rather than simply functioning as an interest group out for our own is disingenuous.

There's also plenty of reason to question your assertion that wage adjustment is required because of the inevitability of increased quality of life. There's a reasonably compelling argument to be made that the affluence we've enjoyed is really the result of national living beyond our means and wild abuse of natural resources, a thoroughly unsustainable situation that means things are gonna get a heck of a lot worse before, or if, they get better.

Though there is a bright side to this dark scenario: maybe we can decline to prehistoric level and the sexual attraction and misunderstood evolutionary psychology theories espoused by many in the previous "chicken" thread will be proven correct.

Posted by: Gen 8 (no hebrew symols on my keybd) | Jan 11, 2005 3:26:40 PM

What about a progressive price-indexing scheme? That is, why couldn't the prospective social security benefits of high wage earners - who typically have generous corporate pensions and 401(k) assets - be price indexed while the benefits of low-wage workers continue to be wage-indexed? The benefits of individuals in the middle would be indexed at a blended rate based upon their historical income levels. Wouldn't a scheme such as this be beneficial to low-income individuals while still reducing the country's future Social Security liability? I don't understand why this is an "either-or" issue...

Posted by: Aziz | Jan 11, 2005 3:35:50 PM

Sure, sure, sure, you've got all this cool stuff, but the contemporary music you can play on your ipod sucks, everything's gotten too crowded, for some strange reason your entire generation feels compelled to wear your hair in either a prisoner motif or that ticky tacky gelled dweeb style, and college basketball has been ruined.

Food has gotten much better, though.

Posted by: ostap | Jan 11, 2005 3:55:56 PM

Let's get back to basics. Social Security is a safety net for survival and mimimum comfort. 401K's are for buying toys when you're old. And the price index already covers a lot of advanced technology. A $15,000 car today is a lot better than a $2,000 car in l955, but we don't discount the price index just because the 2,005 model has a CD/MP3 player instead of just an AM radio. The housing price index includes the cost of all the technological advances that make houses safer and more comfortable.
Bottom line is we will have to start paying out less (relatively) or taxing more. The three basic ways to pay less are to cut down on cost of living increases, impose a means test, or increase the retirement age. The two basic ways to increase social security taxes would be across the board, or take more from upper income wage earners by taxing all wages. What is your solution?

Posted by: Steve Funk | Jan 11, 2005 4:41:36 PM

Matt writes:

What was considered a normal life back then would be abject poverty today. President George W. Bush is proposing that my generation be condemned to a similar fate...life...decades from now...will be much better than life today...in part, because of the contributions people my age will make to America's growing store of public and private capital and technical knowledge. Social Security will allow us to participate in the prosperity that we will have helped to create. Bush wants to deny us that opportunity, and it isn't right.

Yes, Bush's goal is definitely to deny Matthew and Barb and Jenna the opportunity to afford the 14th generation Ipod (the one that plays music video holograms and and has a built-in geiger counter).

What Bush and a lot of folks really want is not to destroy the opportunity of old people to enjoy a high standard of living -- they want to enhance that opportunity by giving us more prosperity. They want to improve the economy's longterm performance and save us from the fate of the slow-growing Europeans. One way to do that is to tackle the deadweight and moral hazard issues with which large, un-means tested, payroll tax-supported entitlement programs are replete. Believe it or not, some people might find a way to enjoy a prosperous old age that doesn't depend on a government program's "allowing" them to do anything.

Posted by: P.B. Almeida | Jan 11, 2005 4:50:43 PM

Cut the crap, people. With all that allegedly generous indexing - an average SS benefit is $900/month or so. That's a disgrace, they are eating dog food. Futuristic goods and services my ass.

Posted by: abb1 | Jan 11, 2005 4:52:09 PM

Let's get back to basics. Social Security is a safety net for survival and mimimum comfort.

I see no reason not to index that minimum guarantee to the general level of prosperity; i.e., to wages.

Certainly, an acceptable minimum level of survival in 1789 is not what anyone here would accept as an acceptable minim in 2004. But locking Social Security benefits to inflation suggests that the minimum guaranteed level should always remain constant, not advance with the times.

Looking retrospectively, that's clearly not something most would accept. Why should it be so prospectively?

Posted by: cmdicely | Jan 11, 2005 5:07:37 PM

Same tax rate, higher real wages = higher real tax payments, which means you are entitled to higher real benefits. QED! Excellent for a non-economist! But to be fair, it was kharris commenting over at DeLong's blog that first put this forth. She was not quite so sure of her argument and you put it much better than either KH or I could. Well done!

Posted by: pgl | Jan 11, 2005 5:11:52 PM

Steve Funk - I don't disagree with your position. But let's suppose we go to price indexing. Doesn't that mean future generations should be paying in at lower rates than current ones? Alas, the Bush crowd does not seem to agree with the conservative principle. TAX those future generations' labor income!

Posted by: pgl | Jan 11, 2005 5:13:32 PM

First, Gen 8, you do deserve an increase that is above the CPI, because otherwise you will not be able to support yourself at anywhere near the level that you will be living at prior to retirement. Since these benefits are based on what you have put in, they should increase as you put in more. The increase in the payments in are caused by increased wages and not increased in inflation. Yes, inflation plays a role, but not the whole ball of wax is due to inflation, hence the difference between CPI and WI. You are right that we have been leeches on society thus far, but we are not expected to start producing and sustaining ourselves to our mid 20s. At this point you start putting more money in than you have sapped out. I am sure I will pay more in taxes than my parents have spent raising me over my lifetime. Just ask your parents.

For those of you who seemed to miss the boat P.B. Social Security is meant to support those who tried to make it on their own, but no longer can. Most American's can probably live without SS. But the number that can't will drag down the economy much more than you can imagine.

Bush's proposal will not insure a stable economy better than that of Europe. Just as Britain how it thinks their Private Account system is working, or the thousands of poor elderly in other European contries.

I pay into a system and expect to get back what I was told I would. And if for some reason I get screwed and lose my job, thank G-d, SS will allow me to sustain myself.

Posted by: Craig Press | Jan 11, 2005 5:14:54 PM

Yglesias,
Do we need to throw around the word "rights" for this one? Don't burn a tattered flag, if you please.

Posted by: Downto | Jan 11, 2005 5:17:38 PM

As abb1 pointed out, SS benefits are never going to be more than a safety net that keeps a retired person from having to beg for food. That is certainly true for residents of blue states, although SS might well pay for a very comfortable living in Mississippi, assuming a comfortable living is even possible there.

I grew up in a house with no running water, no indoor plumbing of any kind, wood stove heating, no insulation, kerosene stove cooking, etc. Try to find that today in Sacramento, California. Oh, and my parents raised most of their food in a big garden, so a large lot is also needed. Today's housing code prohibits living like that here, but maybe not in red states.

Posted by: Vaughn Hopkins | Jan 11, 2005 5:19:10 PM

Um, Matthew, it won't be YOUR generation that truly gets the shaft. As always, the denizens of Generation X will get it worst...in this case paying into the old system for almost half of our working lives while suffering whatever benefit cuts are imposed.

Posted by: Blue | Jan 11, 2005 5:33:36 PM

"First, Gen 8, you do deserve an increase that is above the CPI, because otherwise you will not be able to support yourself at anywhere near the level that you will be living at prior to retirement."

You shouldn't rely on SS to support whatever level of income you had when you retire. It should cover a MINIMUM.

"For those of you who seemed to miss the boat P.B. Social Security is meant to support those who tried to make it on their own, but no longer can."

Ah, another recruit to means-testing.

Posted by: Sebastian Holsclaw | Jan 11, 2005 5:46:03 PM

Sebastian, I didn't say at the same level of income, I said anywhere near. Further, I believe that currently benefits are calculated based on lifetime earnings, so your level of income is reflected in the benefits. Thus it does not provide a minumum. A millionaire could certainly live on his/her benefits, and not be in the slums.

Further, I might believe in means testing at some future point, but that is not the current system and it is meant to be a safety net. I do believe that if you pay in you should get something back.

Posted by: Craig Press | Jan 11, 2005 5:55:02 PM

I've been convinced that benefit cuts aren't needed now and that social security is a safety net that provides a minimum payment. But the following is correct:

"The three basic ways to pay less are to cut down on cost of living increases, impose a means test, or increase the retirement age. The two basic ways to increase social security taxes would be across the board, or take more from upper income wage earners by taxing all wages. What is your solution?"

It's pretty obvious the retirement age should increase, but I contend it's against the programs original mandate to tax all earned income without expanding payments to those who pay more. Same thing for means testing. This isn't welfare. This is a program with the idea that there is an earned right that provides a minimum benefit. Why should someone making $400,000 have to earn my minimum benefit?

That leaves COL increases and increasing taxes. I feel that 15% is enough to ensure my minumum benefit.

Posted by: Chad | Jan 11, 2005 5:59:36 PM

The most basic reason why I'm entitled to wage-indexed benefits is, simply: That's what the law says.

Nice argument. Now, when the law changes you can't say you're entitled to wage-indexed benefits, because, well, you wouldn't be. QED.

Posted by: Al | Jan 11, 2005 6:01:08 PM

It's pretty obvious the retirement age should increase, but I contend it's against the programs original mandate to tax all earned income without expanding payments to those who pay more.

So? Make it a flat tax on all income (not just wage income) and increase benefits -- at a reduced rate of benefit per unit contribution -- for those putting in more than they would under the current caps. In the short term you bring in a lot more money (both by expanding who pays tax, and by expanding what income they pay it on), and stave off even the pessimistically projected distant crisis, and in the long-term you modestly help the balance (as the additional benefits are more than offset by the additional contributions).

Posted by: cmdicely | Jan 11, 2005 6:17:07 PM

"First, Gen 8, you do deserve an increase that is above the CPI, because otherwise you will not be able to support yourself at anywhere near the level that you will be living at prior to retirement."

No, because I'm just at the start of my career, I have my entire career to take into account that I will not be getting the same level of social security benefits and to adjust my current lifestyle and savings choices accordingly. I don't deserve anything or a better standards of life (or even equal one) than my folks or childhood simply because I happened to be born later.

I do recognize that, as Blue, notes, people who have been working longer and paying in more do stand to lose a benefit into which they've paid and on the expectation of which they've based their saving and spending decisions, so I'd endorse the notion that they do deserve something.

But if the law changes tomorrow (as Al pointed out), none of us not yet in the workforce or who've been working less than a few years have any legitimate argument we're entitled to anything.

Posted by: Gen8 | Jan 11, 2005 6:17:17 PM

You seem to have a profound misunderstanding about how the CPI works. You should realize that the Consumer Price Index basket of goods does not remain constant over all the time it charts. For instance telephone access appears, as does cable access and airfare access. Your argument turns on the purchase of new items which are in fact reflected in the CPI basket of goods.


Yes, this is exactly right. And it shows how embarrasingly Matthew has erred in his article. Because if Matthew understood this point, he would know that this sentence is UTTERLY WRONG:

"Imagine we'd pegged Social Security benefits not to the standard of living of the 1940s but to the prevalent level of wages at America's founding in the late 18th century. Senior citizens wouldn't be able to afford plumbing, rudimentary medical care, refrigerators, motorized transportation, pasteurized milk, modern insulation, or any number of other things we take for granted."

Let's say that we SS in 1900 that were in such an amount as to give benefits allowing the recipient to buy a basket of goods: say, a horse-drawn carriage transportation, a coal fired stove for heat, and a home with outdoor plumbing for shelter. If we indexed those benefits by CPI, the amount that would be received today WOULD NOT BE the amount of money it would take to purchase a horse-drawn carriage, a coal-fired stove, and a home with outhouse. Rather, it would be the amount of money necessary to buy THE 2005 EQUIVALENTS of those items - say, a Ford Focus for transportation, an oil heat/air conditioning system for heat, and a home with 2.5 bathrooms for shelter.

In fact, every decade or so, a lot of work is put into revising the "basket of goods" that the CPI supposedly measures.

Really, truly embarrassing for Matthew. Sorry.

Posted by: Al | Jan 11, 2005 6:30:57 PM

I am definitely not supporting privatization, although it might have worked in 2001, without the Bush tax cut and the Iraq war. I was looking at price indexing only as a separate proposal to balance the books. Social security taxes were never about inter-generational fairness. The tax rate is supposed to be what is needed to pay the expected benefits.
Gadgets are usually a taste acquired by the young. When you are 65, you might not even want the latest and greatest. My Mother never sends e-mail. If I had to live on SS, it wouldn't bother me too much to give up cable, internet access, cell phones and the daily newspaper. The library is four blocks away.

Posted by: Steve Funk | Jan 11, 2005 6:33:20 PM

> Make it a flat tax on all income (not just wage income) and increase benefits -- at a reduced rate of benefit per unit contribution -- for those putting in more than they would under the current caps.

I contend you don't understand the whole "earned right" philosophy behind SS. Or you just don't agree with it.

It seems to me that if in the future our economy hasn't grown to support the current benefits, the we will have to change the behind the scenes benefit calculation to reduce benefits and balance the books. We should probable do a little of that right now, but we have a surplus, so I don't see a crisis. After looking at how benefits are structured, SS isn't a good deal for me regardless. I'm paying close to the max, but don't get much back for those added contributions.

Posted by: Chad | Jan 12, 2005 9:36:37 AM

"Same thing for means testing. This isn't welfare. This is a program with the idea that there is an earned right that provides a minimum benefit."

Until very recently, we did have a very restrictive blue collar means test for social security. If you made more than $17,000 per year from working, your benefits went down. This was very unfair because it hurt the guy with no other assets who went back to work, but didn't affect someone making six figures from interest, dividends and private pensions.
Taxing social security benefits, which we did for several years, was also a means test. It didn't affect those living solely on social security, but took back up to 36% of benefits for those with higher incomes.

Posted by: Steve Funk | Jan 12, 2005 11:00:33 AM

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