The pseudo-statistics come from a report by the Congressional Research Service, an arm of the Library of Congress (the report is not available online at this time). The latest reform opponent to quote them is the Economic Policy Institute, a leftist think-tank funded by big-labor money. EPI begins by saying "It is hard to overstate the effect of that substitution on hypothetical future benefits" -- but then proceeds to show how easy it is, just by quoting the CRS's erroneous numbers:

Under the current wage indexation, the Social Security benefit for a person with average earnings over one's lifetime and retiring in 2005 would be $15,336 per year, replacing 42% of the average worker's income. If, however, price indexing had been used instead of wage indexing, that same 2005 retiree would receive only $6,180 per year, replacing just 17% of income. In other words, as the figure shows, a change from wage indexation to price indexation would have meant a 60% cut in Social Security benefits for today's retirees.

...CRS also determined how this change would affect the elderly (people aged 65 and older) living in poverty in 2003. ...in 2003, 3.6 million elderly, or 10.2% of the noninstitutionalized elderly, lived in poverty. If Social Security benefits had been calculated using price indexation, an additional 7 million elderly would currently be living in poverty, bringing the total to 10.5 million, or 30.4% of the elderly.

There's no question that price indexing would produce slower benefit growth than the current wage indexing scheme. When benefits grow slower, benefits in the future are going to be lower than otherwise. Flash! That's the whole point. But the CRS report offers unrealistic numbers based on sloppy research and false logic.

First, CRS quantified total growth in CPI since 1940. Then they quantified total growth in wages since 1940. They found that total CPI growth was 58% less than wage growth from 1940-2003. So they studied the effects of a 55% reduction in current benefits (58% for 65-year-olds, 53% for 80-year-olds) from today’s levels.

This method contains many basic and embarrassing statistical errors. For one thing, CRS compared the effects of price indexing of benefits since 1940, to a baseline assumption that benefits have been wage-indexed since 1940. But benefits were not wage-indexed in 1940. The current wage-indexing system was put in place in 1977. Oops!

What's worse, price-indexing would have been an increase in benefits relative to benefits in many of the early phases of the program. For example, average real Social Security benefits actually declined in value from 1940 through 1950, because they were not indexed, and were eroded by inflation. When wage indexation was instituted in 1977, that was one of the few periods in our recent economic history when real wage growth was negative. Hence, during the years surrounding the period when wage indexing was created, price indexing would have increased benefits.

If price indexing had been in effect since 1977, we would not now be facing the fiscal shortfalls that are projected. And far fewer of the 1983 reforms would have been necessary to try balance Social Security’s finances. Had price indexing been in effect, Congress might not have needed to raise the retirement age to attain actuarial balance in 1983. But the CRS research doesn't even consider such important questions.

CRS assumes that benefits would be 55% lower today had price-indexing been in effect since 1940. Putting aside the invalidity of the figure, it should be recognized that if benefit expenditures on Social Security today were 55% lower than is presently the case, the Social Security surplus would increase by $280 billion in 2005 and Social Security would not face an actuarial imbalance going forward. If benefits were indeed 55% lower and Social Security were sitting on a cash excess of more than $300 billion per year, it is reasonable to assume that some or even most of this money would be spent to keep seniors out of poverty.

Further, it is not clearly the case that price indexing would increase elderly poverty in the future. Federal measurements of poverty are tied to purchasing power, from which price-indexation would provide full protection. By contrast, wage indexation in perpetuity, if it were affordable, would cause benefits to rise much faster than necessary to protect seniors from poverty -- if that is, indeed, the goal of all this.

Buy hey, other than that, CRS got it exactly right. So expect more and more liberal think-tanks like EPI to let CRS's funny numbers do their thinking for them.

Posted by Donald L. Luskin at 1:46 PM | link  

Tuesday, February 08, 2005

Posted by Donald L. Luskin at 5:52 PM | link  

Posted by Donald L. Luskin at 2:13 PM | link  

Monday, February 07, 2005