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Social Security's Five OASI Inflation Indexing Problems

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  • Lovell, Michael C.

Abstract

This paper examines five problems with the indexing procedures used by the Social Security Administration of the United States in taking inflation into account when calculating Old Age and Survivor Insurance (OASI) Benefits. Because of the commin-gling of unindexed with indexed earnings, a retiree born in 1930 who continued in a high earning career until age 75 receives an annual benefit more than $1,800 larger than would have been generated with full indexing. While the inflation indexing problems identified in this paper do not attract much attention in normal times, they can contribute to serious short-run financial instability for the OASI trust fund in periods of substantial inflation or deflation. They make the percentage increase in your inflation adjusted (CPI-W) benefit if you elect to postpone retirement and the start of OASI benefits depend in part on the pace of inflation. This paper explains how these problems could be resolved in a way that would not hurt and might help resolve Social Security's longrun solvency problems. --

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2009-3
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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 3 (2009)
Issue (Month): 3 ()
Pages: 1-41

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Handle: RePEc:zbw:ifweej:7547

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Keywords: Social security; inflation; indexing;

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  1. Alan L. Gustman & Thomas L. Steinmeier, 2000. "How Effective is Redistribution Under the Social Security Benefit Formula?," Working Papers wp005, University of Michigan, Michigan Retirement Research Center.
  2. Song, Jae G. & Manchester, Joyce, 2007. "New evidence on earnings and benefit claims following changes in the retirement earnings test in 2000," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 669-700, April.
  3. Andrew G. Biggs & Jeffrey R. Brown & Glenn Springstead, 2005. "Alternative Methods of Price Indexing Social Security: Implications for Benefits and System Financing," NBER Working Papers 11406, National Bureau of Economic Research, Inc.
  4. Martin Feldstein, 2005. "Rethinking Social Insurance," NBER Working Papers 11250, National Bureau of Economic Research, Inc.
  5. Alicia H. Munnell & Dan Muldoon, 2008. "The Impact of Inflation on Social Security Benefits," Issues in Brief ib2008-8-15, Center for Retirement Research, revised Oct 2008.
  6. Richard Rogerson & Johanna Wallenius, 2007. "Micro and Macro Elasticities in a Life Cycle Model With Taxes," NBER Working Papers 13017, National Bureau of Economic Research, Inc.
  7. James E. Duggan & Robert Gillingham & John S. Greenlees, 1996. "Distributional Effects of Social Security: the Notch Issue Revisited," Public Finance Review, , vol. 24(3), pages 349-370, July.
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