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Alternative Methods of Price Indexing Social Security: Implications for Benefits and System Financing

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  • Biggs, Andrew G.
  • Brown, Jeffrey R.
  • Springstead, Glenn

Abstract

This paper explains four methods of "price indexing" initial Social Security retirement benefits, and discusses the effect of each method on the fiscal sustainability of Social Security, benefit levels and replacement rates, redistribution, and sensitivity of system finances to demographic and economic shocks. Of these methods, Primary Insurance Amount (PIA) Factor Indexing would generate the largest cost savings while reducing benefit growth at approximately an equal rate for all income levels. Methods that index the Average Indexed Monthly Earnings (AIME), the formula "bend points," or both, would reduce benefit growth at a slower rate and would have different effects on benefit distribution and system sustainability.

Suggested Citation

  • Biggs, Andrew G. & Brown, Jeffrey R. & Springstead, Glenn, 2005. "Alternative Methods of Price Indexing Social Security: Implications for Benefits and System Financing," National Tax Journal, National Tax Association;National Tax Journal, vol. 58(3), pages 483-504, September.
    • Handle: RePEc:ntj:journl:v:58:y:2005:i:3:p:483-504
    DOI: 10.17310/ntj.2005.3.12
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    1. Gustman, Alan L. & Steinmeier, Thomas L., 2001. "How effective is redistribution under the social security benefit formula?," Journal of Public Economics, Elsevier, vol. 82(1), pages 1-28, October.
    2. Jagadeesh Gokhale & Kent Smetters, 2005. "Measuring Social Security’s Financial Problems," Working Papers wp093, University of Michigan, Michigan Retirement Research Center.
    3. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
    4. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-183, May.
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    Cited by:

    1. Ann Huff Stevens, 2008. "Retirement Wealth Across Cohorts: The Role of Earnings Inequality and Pension Changes," Working Papers wp186, University of Michigan, Michigan Retirement Research Center.
    2. András Simonovits, 2020. "Indexing Public Pensions in Progress to Wages or Prices," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 12(2), pages 171-194, June.
    3. Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
    4. Lovell, Michael C., 2009. "Social Security's Five OASI Inflation Indexing Problems," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-41.
    5. John R. Moran & JKosali Ilayperuma Simon, 2006. "Income and the Use of Prescription Drugs by the Elderly: Evidence from the Notch Cohorts," Journal of Human Resources, University of Wisconsin Press, vol. 41(2).
    6. Andras Simonovits, 2020. "Indexing public pensions in progress to wages or prices," CERS-IE WORKING PAPERS 2015, Institute of Economics, Centre for Economic and Regional Studies.
    7. Juergen Jung & Chung Tran, 2008. "The Macroeconomics of Health Savings Accounts," CAEPR Working Papers 2007-023, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    8. John Cawley & John Moran & Kosali Simon, 2010. "The impact of income on the weight of elderly Americans," Health Economics, John Wiley & Sons, Ltd., vol. 19(8), pages 979-993, August.

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    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

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