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March 16, 2005
Progressive Indexing and a $3.7 Trillion Shortfall
Robert Pozen had an interesting op-ed in the WSJ yesterday. Entitled "A 'Progressive' Solution for Social Security," it detailed one proposal to eliminate the unfunded liabilities of Social Security by combining PSAs with "progressive indexing." The way it would work is that benefits would continue to be tied to wage growth for those workers who had an average income below $25,000. On the other end, benefits would now be indexed to the slower growth rate of the CPI for workers who averaged above a $113,000 annual income. If your average income was between these two figures, then a portion of your benefit growth would be tied to prices and a portion to wages.
Hopefully that is the kind of solution that will lead political parties to find some common ground on the issue of reform and help up move towards a system where the majority of individuals can rely on their own savings for retirement, and not the tax dollars of their children and grandchildren.
However Pozen has one error in his piece. He states that:
In order to finance the currently scheduled level of Social Security benefits, the federal government must borrow $3.7 trillion over the next 75 years -- the standard period for measuring the solvency of Social Security.
But his figure $3.7 trillion is far too low. $3.7 trillion is the present value of the unfunded liabilities over the next 75 years, not the amount we're going to have to borrow (which is actually in excess of $24 trillion). An easier way to think about it is that if the government found an extra $3.7 lying around last year, it could have put this money in a bank and Social Security would have been able to remain as we know it for the next 75 years.
For an excellent critique of the confusion surrounding all these numbers see here.
Posted by Peter Mork at March 16, 2005 4:03 PM
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If you haven’t taken a look at Economics With A Face, blogged by Peter Mork, you should. He has a very good post on Jonathan Chait’s recent piece in The New Republic. He also has one noting that Robert Pozen’s... [Read More]
Tracked on March 17, 2005 10:02 AM
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