Thursday, June 02, 2005

Amateur Hour at the Post

Sorry to be ragging on the Post again, but meant to mention this offering of theirs over the weekend. Lacking anything better to do, the editors venture into Social Security policy and along the way, suggest that because benefits are growing at such a high rate, that maybe the president's "progressive indexing" proposal warrents attention.

Part of their argument rests on their blurring together the combined benefits of Social Security and Medicare, which Dean Baker responds to by giving the editorial's writers the business. The editorial also fails to mention that the rising benefits have been funded by increases in the payroll tax, which again, Baker takes them over the coals for.

But there's more. The Post implies that benefits are increasing at too great a rate. But the current benefit formula that was put into place in 1977 was designed to maintain a constant replacement rate between one's earnings and one's benefits. This replacement rate could be any ratio of earnings to benefits. Currently it's estimated that the average lifetime earner gets a replacement rate of about 42%. Maybe this replacement rate is too high given the level of payroll taxes and the expected change in the ratio of current to retired workers. But the problem isn't necessarily that benefits are growing too fast. The growth rate in benefits is largely secondary to the relationship between the tax base that funds benefits and the replacement rate of benefits. While altering the growth of benefits is expected to improve the ratio between taxes and benefits, the growth rate itself is not really the issue.

Under progressive price indexing or regular price indexing, though, benefits as a share of past earnings will continue to decline indefinitely, eventually amounting to zero if the policy is not eventually altered. The Post's editorial doesn't address this. Nor does it address the relationship between price indexing and the introduction of personal accounts within Social Security. If benefits continue to decline in value, calls for adding or increasing the share of payroll taxes devoted to personal accounts could very well increase. So any provision that leads to a declining value in social security benefits (as opposed to changes that have a one time effect) could be used as a wedge for personal accounts.

Do the Post editors get this?

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