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Reform Thursday: Week Fifteen.

Thursdays are good days for reform, because they fall between Wednesdays and Fridays.

That's why WILLisms.com will display a chart or graph, every Thursday, pertinent to Social Security reform. The graphics are mostly self-explanatory, but we include commentary on some of them where and when necessary.

This week, we examine Progressive Indexing in Social Security-

First, why pegging Social Security benefit growth to wages is causing such a headache:

Click image for full .pdf.

Wages far outpace inflation. If, in the future, benefits grow based on inflation, you get the green bars. If they grow based on wage growth, you get the red bars. The problem is: THE SYSTEM CANNOT HANDLE THAT KIND OF GROWTH. Beginning just a dozen years from today, as the Baby Boom generation begins retiring in full force, Social Security will begin paying out more than it takes in.

There is a structural deficit in Social Security that needs to be addressed at its root.

Price indexing, according to many estimates, would wipe out nearly the entire unfunded liability of Social Security. But some believe it might leave the poorest of Americans behind.

In comes progressive indexing, which is somewhere in the middle, between wage and price indexing. Progressive indexing slows the rate of benefit growth for the highest income earners, while preserving benefit growth pegged to wages for lower income earners:

Click image for full .pdf.

According to Steve Goss, Chief Actuary of the Social Security Administration, this progressive indexing formula would wipe out around 3/4 of Social Security's long-term deficit (.pdf). The remaining solvency problem could be solved in a number of other ways.

But won't this short-change people? Isn't this still a cut in benefits?

Not at all. People will have the choice of contributing some of their payroll taxes to personal savings accounts, much like the Thrift Savings Plan (TSP) profiled last week. Through these personal accounts, which individuals, not the government, own, people will have the opportunity to earn compound interest, more than making up for the shortfall.

The brilliance of personal accounts is that, on the individual level, a retiree will not notice a drop in benefits (in fact, he or she will almost certainly see larger benefits). In terms of getting a check in the mail (or a direct deposit), nothing changes.

But, meanwhile, from the government's perspective, the benefits paid out are reduced enormously.

It's a win-win. Gramps gets his check. The solvency crisis is averted. A major entitlement eats up less rather than more of the federal budget. More capital is put to use in the American free enterprise system. Everyone is happy.

Yay.

Source:

The Joint Economic Committee of the United States Congress; Understanding Progressive Indexing (.pdf), April 27, 2005.

Previous Reform Thursday graphics can be seen here:

-Week One.
-Week Two.
-Week Three.
-Week Three, bonus.
-Week Four.
-Week Five.
-Week Six.
-Week Six, bonus.
-Week Seven.
-Week Seven, bonus.
-Week Eight.
-Week Nine.
-Week Ten.
-Week Eleven.
-Week Twelve.
-Week Thirteen.
-Week Fourteen.

Tune into WILLisms.com each Thursday for more important graphical data supporting Social Security reform.

Posted by Will Franklin · 12 May 2005 10:09 AM

Comments

Posted by: Hoodlumman at May 12, 2005 10:37 AM

Posted by: Zsa Zsa at May 12, 2005 10:53 AM

Posted by: Willbur at May 12, 2005 11:33 AM

Posted by: Willbur at May 12, 2005 11:52 AM

Posted by: Zsa Zsa at May 12, 2005 08:36 PM