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

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

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.

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Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 58 (2005)
Issue (Month): 3 (September)
Pages: 483-504

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Handle: RePEc:ntj:journl:v:58:y:2005:i:3:p:483-504
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  1. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  2. 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.
  3. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-83, May.
  4. Jagadeesh Gokhale & Kent Smetters, 2005. "Measuring Social Security's Financial Problems," NBER Working Papers 11060, National Bureau of Economic Research, Inc.
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