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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.

Suggested Citation

  • Lovell, Michael C., 2009. "Social Security's Five OASI Inflation Indexing Problems," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-41.
  • Handle: RePEc:zbw:ifweej:7547
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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2009-3
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    File URL: https://www.econstor.eu/bitstream/10419/27523/1/economics_2009-3.pdf
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    References listed on IDEAS

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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. Martin Feldstein, 2005. "Rethinking Social Insurance," American Economic Review, American Economic Association, vol. 95(1), pages 1-24, March.
    3. 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.
    4. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
    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. 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.
    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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    Cited by:

    1. Stefan Domonkos & Andras Simonovits, 2016. "Pensions in transition in EU11 countries between 1990 and 2015," IEHAS Discussion Papers 1615, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

    More about this item

    Keywords

    Social security; inflation; indexing;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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