| What is Progressive Price Indexing? |
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JTF#17 IntroductionAs just reiterated in the 2005 Trustees Report, Social Security faces a 75-year deficit equal to roughly 2 percent of taxable payrolls. Closing this gap requires either a cut in benefits or an increase in taxes. One approach to cutting benefits under consideration by the administration is to change how benefits are indexed. An earlier Just the Facts explored the implications for benefits of moving from “wage indexing” of benefits to “price indexing.” This Just the Facts describes a proposal for “progressive price indexing.” The notion is that benefits for low-wage earners would continue to rise in line with wages, while those for maximum earners would rise in line with prices; everyone in between would see some combination of the two. The implication is that replacement rates — benefits as a percent of pre-retirement earnings — for low earners would remain constant over time, but replacement rates for high earners would decline sharply. The higher the earnings, the sharper would be the decline. For full paper in PDF Alicia H. Munnell is the director of the Center for Retirement Research at Boston College and the Peter F. Drucker Professor in Management Sciences at Boston College's Carroll School of Management. Mauricio Soto is a graduate student in economics at Boston College. |