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Social Security’s Five OASI Inflation Indexing Problems

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  • Michael C. Lovell

    ()
    (Department of Economics, Wesleyan University)

Abstract

This paper examines five problems with the inflation indexing procedures used by the Social Security Administration in taking inflation into account when calculating Old Age and Survivors Insurance (OASI) Benefits. Several of these problems have capricious distributional consequences. For example, as a result of Problems #2 and #4 your OASI check will be larger if wage inflation happens to be extra high in your 60th year or if price inflation is exceptionally low in your 61st year. And because of Problem #1, the size of the benefit increase you will receive if you elect to postpone retirement and the start of OASI benefits depends in part on the pace of inflation. While indexing problems do not attract much attention in normal times, they can contribute to serious short-run financial instability for the OASI trust funds in periods of substantial inflation.

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Bibliographic Info

Paper provided by Wesleyan University, Department of Economics in its series Wesleyan Economics Working Papers with number 2008-006.

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Length: 36 pages
Date of creation: Jul 2008
Date of revision: 30 Oct 2008
Publication status: Published on-line at economics http://www.economics-ejournal.org/
Handle: RePEc:wes:weswpa:2008-006

Note: Earlier versions available at http://repec.wesleyan.edu/pdf/mlovell/2008006_lovell.pdf , http://repec.wesleyan.edu/pdf/mlovell/2008006rev0908_lovell.pdf and http://repec.wesleyan.edu/pdf/mlovell/2008006rev1008_lovell.pdf
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  1. Martin Feldstein, 2005. "Rethinking Social Insurance," NBER Working Papers 11250, National Bureau of Economic Research, Inc.
  2. Alan L. Gustman & Thomas L. Steinmeier, 2000. "How Effective is Redistribution Under the Social Security Benefit Formula?," NBER Working Papers 7597, National Bureau of Economic Research, Inc.
  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. 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.
  5. 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.
  6. 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.
  7. 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.
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