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December 03, 2004

Why Can't SS Benefits Rise w Wages?

So the Bush administration is starting to admit that social security privatization means cuts in benefits. But they are also making a more general assault on a core principle of social security: the idea that the benefits for retirees should reflect rising wages in the general population. Gregory Mankiw, Bush's chairman of the Council of Economic Advisers said retirees should suck it up and accept lower benefits in the future:

[Mankiw] took particular aim at a specific feature of current law under which retirement benefits are linked to the rise in wages rather than the rise in consumer prices.

"Each generation of retirees receives higher real benefits than the generation before it," Mr. Mankiw said. Because wages typically climb faster than inflation, he said, an average worker retiring in 2050 would get benefits that are 40 percent higher, after inflation, than a comparable worker who retires this year.

But higher benefits in the future makes sense. If our working society is richer, our retirees should be living better. Do we really think folks who worked during the Depression era should have to live on wage levels from that period?

Evidentially yes-- in the plans of the Bush administration for the equivalent situation in the future.

Here's the intellectual game they seem to be setting up. First, they say that benefits in the future should only reflect increases in inflation, not increases in wages. Having established a much lower base for what benefits will be delivered in the future, they implement privatization with much lower projected benefits but declare they've achieved their goals with "no cuts in benefits" (when adjusted for inflation rather than for increases in wages).

Don't let them get away with this. If wages are growing in the future, that means people working are richer and more productive. If everyone is richer, why can't we make sure that retired people are better off as well? "Higher taxes" sounds scary, but if the only reason it's hard to pay for retiree benefits is because -- horrors -- we expect people working to be so much richer, we can afford a slight increase in taxes if that's what's needed.

Let's be clear what that means. Under the "doomsday" scenario described above, workers will in 2050 be making 40% more in wages -- even after adjusting for inflation. So a 2% increase in payroll taxes -- far more than needed under any projection -- would still leave workers far better off in the future since their wages minus taxes will still be far higher than today. So what's the crisis?

And remember, despite the scare tactics, there are plenty of ways to deal with social security issues other than increases current payroll taxes. No payroll taxes are currently paid on wages above about $87,000 per year or on any investment income, so lifting the cap on payroll taxes would fully fund the system for the future. Or we can allowing in more immigrants -- needed if we have lots of retirees needing to be taken care of -- which will create more workers paying more payroll taxes, so again no crisis.

If we are all getting richer in the future, there's no "doomsday" bankruptcy for social security in the future. Don't let the public buy their hype.

Posted by Nathan at December 3, 2004 09:16 AM