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Shiller: Index Social Security Benefits to GDP

By    |   Monday, 10 June 2013 08:40 AM

With Social Security reserves expected to run out 2033, how should we reform the system?

By indexing benefits to gross domestic product (GDP), Yale economist Robert Shiller writes in The New York Times.

Social Security is now indexed to inflation, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers, and President Obama has proposed changing the indexing to the Chained Consumer Price Index for All Urban Consumers, which puts inflation at a lower level.

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"This seems to correct a real technical error," Shiller says.

"Economists have argued that the current index overstates the actual inflation rate, and that a switch . . . would make the inflation indexing more accurate, seemingly justifying the resulting gradual reduction in benefits."

But there's a fly in the ointment. "The proposal solves the wrong problem and, in doing so, undermines the integrity of the Social Security system," he writes.

"The purpose of Social Security is to help families. It reinforces the intergenerational sharing that families already — though imperfectly — provide. It helps retirees by stabilizing their income, and it helps their grown children, who are relieved of any excessive burden of supporting them."

That "suggests that the Social Security benefits should be indexed to some measure of the available, aggregate economic pie," Shiller explains

And so his answer is GDP.

"While this new idea won't solve insolvency — we may need to raise Social Security contributions to do that — it would support the principle that one generation shouldn't be more burdened than another," he notes.

"The point of GDP indexing is to align the interests of the retired with society as a whole," Shiller adds. "Older Americans should share both the windfalls and the losses with other generations — with working adults, and with children."

Other ideas abound for fixing Social Security. Andrew Biggs of the American Enterprise Institute, Eugene Steuerle of the Urban Institute and John Shoven of Stanford University believe that increased longevity demands that the program create incentives for people to work longer.

At a March symposium, Steuerle advocated partial retirement plans to encourage workers to keep going even after they can start earning Social Security. The minimum age for Social Security collection is now 62.

Biggs advocates dropping the 12.4 percent Social Security payroll tax for workers older than 62, giving them a good reason to keep working after that age. The shortfall in tax revenue would be made up by the increase in taxes these people would pay on their income.

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With Social Security reserves expected to run out 2033, how should we reform the system? By indexing benefits to gross domestic product (GDP), Yale economist Robert Shiller writes in The New York Times.
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2013-40-10
Monday, 10 June 2013 08:40 AM
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