Social Security Peg Is a Fix Boomers Can Embrace

Oct. 18 (Bloomberg) — High tide is a mystical moment for a lot of us. We actually stand on the beach hoping to capture that second when the foam reaches farthest up on the sand.

Another kind of high tide is sweeping the country these days. It is the high tide of Social Security money.

On Oct. 15 the first baby boomer demonstrated she's ready for more beach-time by applying for a Social Security pension. Kathleen Casey-Kirschling, born on Jan. 1, 1946, leads millions like her. As the boomers head for the beach, the revenue flowing to the government will begin to recede.

Many Americans believe that shift is important — catastrophic even. They also think that there's nothing they can do but watch.

This is wrong. Fixing Social Security is doable. The task isn't as pointless as trying to stop the movement of tides. It's the equivalent of putting a new drain in a swimming pool.

Though you might have missed it, the best method for such a fix was offered by Fred Thompson this month in the Republican presidential candidates' debate. In Michigan, Thompson said that "one of the things that could be done would be to index benefits to inflation. Index benefits to inflation for future retirees."

Thompson's phrasing wasn't clear, but his idea is. Under the current system, seniors' base pension, the number that they start with when they are at the point of Casey-Kirschling, is calculated to reflect not only inflation but also real increases in the average wage over their careers. Real wages in the U.S. tend to rise over time — dramatically, lately. Growing productivity gives workers this reward.

Getting More

The wage increases mean that newer beneficiaries get a bigger pension than their predecessors, even after adjusting for inflation. Thompson was suggesting that we base the formula upon inflation alone. Then every pensioner gets what his big brother or sister did, adjusted for inflation. But not more.

Some call such an adjustment "a cut." But the change is only a cut against what is on the theoretical Social Security books. Given that most young people neither know what is on those books nor believe any money will be left when they get to retirement, the change could better be described as "a reduction in growth." Inflation indexing would reduce the Social Security shortfall of trillions of dollars by more than two-thirds.

How did we ever get the wage peg in the first place? Back in the 1970s, when the current formula was written, officials were more concerned about short-term fixes. As for wages, it wasn't clear that they would always move up in real terms. In fact, real wages in the 1970s averaged negative 0.5 percent.

No Adjustment

So the wage peg wasn't a focus. In the early 1980s, Alan Greenspan headed his legendary Social Security reform commission. But that commission focused more on raising revenue. The results were the higher payroll-tax rates and later retirement ages that we know today, but no peg adjustment.

For the past 10 years or so, various lawmakers and Washington officials have sporadically tried to change the peg. Back in 2001, President George W. Bush appointed another Social Security commission.

As it happened, that commission pushed for a serious reform of the wage peg. But the commission released its report in December of the same year and the findings got lost in the post-Sept. 11 haze. Lawmakers were thinking about Afghanistan, not pension formulas.

A few years later, Senator Orrin Hatch of Utah, a Republican, tried again with a plan called progressive indexation. Under that plan lower earners who retired would get to keep the older, higher, wage-indexed benefits, whereas higher earners would see their benefits adjusted only for inflation. This format did less to narrow future shortfalls, but did more to placate Democrats.

Democrats are supposed to love redistributive plans like this. But again, no dice.

So why do plans like Thompson's get so little traction?

Political Constraints

As Thompson demonstrated, the Keynesian lexicon over indexing is a problem. These days we don't really know what we are saying when we talk about inflation. "Wage inflation" in this context happens to include a real increase in wages.

The larger constraint is political. Both the American Left and Right care about other things more than the pension formula. And both parties are making Social Security hostage to their own greater aims. They're holding off until there is a genuine Social Security crisis. The Right can use a crisis as an opportunity to push through privatization. The Left can use it to redistribute income on a scale grander than Hatch's little compromise.

There's a role here for the non-profit world, which is itself awash in cash. How about a $100 million ad campaign to demystify Thompson's peg proposal? The baby boomers are a remarkably unselfish crowd, in spite of their reputation.

Thanks to Greenspan's commission, boomers spent a good share of their careers paying extra taxes in the name of supporting crabby Depression-era parents. If a clear explanation of this problem actually penetrated the boomer consciousness, they might be willing to trim growth in benefits. That after all would be better than seeing the pension tide pull their own children under water.

(Amity Shlaes, a senior fellow at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.

© Copyright 2007 Bloomberg

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