Wednesday
Standards of living
I actually find the details of the social security policy debate interesting, so I've been following the policy debate fairly carefully. I haven't seen many new arguments policy-wise for about a month. Today I did, but I have to fill in some background first.
Currently, social security benefits are indexed to wages, not prices. There is a fairly complex method behind this, involving "bend points" and other things not worth getting into right now, but overall the rate of growth of social security benefits is faster than inflation, because wages rise faster. In order to lower the future growth of benefits and avoid funding problems sometime in the middle of this century, the Bush administration has publicly discussed indexing benefits to prices, so that they would grow at the same rate as inflation.
As a counter-argument to this view, it is pointed out that indexing to prices freezes the standard of living. If social security was indexed to wages in the 1930's, the elderly would only be getting enough of a social security benefit to pay for a 1930's standard of living, ie., no indoor plumbing in most of the country. I thought this was a very solid argument, but Tyler Cowen's post today has me thinking that a gradual process of switching to price indexing is the way to go. One of the great things about Tyler is that he uses both economic and ethical arguments quite well. His discussion of absolute versus relative standard of living is key and quite worth reading.
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Currently, social security benefits are indexed to wages, not prices. There is a fairly complex method behind this, involving "bend points" and other things not worth getting into right now, but overall the rate of growth of social security benefits is faster than inflation, because wages rise faster. In order to lower the future growth of benefits and avoid funding problems sometime in the middle of this century, the Bush administration has publicly discussed indexing benefits to prices, so that they would grow at the same rate as inflation.
As a counter-argument to this view, it is pointed out that indexing to prices freezes the standard of living. If social security was indexed to wages in the 1930's, the elderly would only be getting enough of a social security benefit to pay for a 1930's standard of living, ie., no indoor plumbing in most of the country. I thought this was a very solid argument, but Tyler Cowen's post today has me thinking that a gradual process of switching to price indexing is the way to go. One of the great things about Tyler is that he uses both economic and ethical arguments quite well. His discussion of absolute versus relative standard of living is key and quite worth reading.
