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Thursday, March 31, 2005

The Wage indexation of *initial* social security benefits does not imply that productivity growth has zero effect on SSA trust fund solvency.

Blahous and Luskin argue that productivity growth has no affect on SSA solvency because benefits are indexed to wages. As far as I can tell from reading Brad's blog "faster productivity growth improves Social Security's finances by an amount equal to roughly half of life expectancy at retirement times the change in the productivity growth rate." and "'the indexation of initial Social Security benefits to wages means that increased benefits offset much of the higher revenue from faster wage growth'" (that is without bothering to look up the SSA's explanation of social security) benefits are indexed partly to prices and partly to wages. The first check received by a retiree, disabled worker or survivor is indexed to wages. Subsequent checks increase proportional to prices.

Consider a hypothetical person (no names but I am younger than that) aged 45 who will live (I hope) past 85. To calculate the number on the check he will get at age 85 take a number somewhere and multiply it by the ratio of wages in 2025 to wages now then multiply it by the ratio of prices in 2045 and prices in 2025. See indexed half to wages half to prices.

I attempted to deduce this formula from Brad's statement "faster productivity growth improves Social Security's finances by an amount equal to roughly half of life expectancy at retirement times the change in the productivity growth rate." OK that would be about right if my guess as to the way the program works is right.

By the way, try to type the name the White House social security "expert" and "Luskin" in the same sentence without trembling.

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