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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.

Suggested Citation

  • Michael C. Lovell, 2008. "Social Security’s Five OASI Inflation Indexing Problems," Wesleyan Economics Working Papers 2008-006, Wesleyan University, Department of Economics, revised 30 Oct 2008.
  • 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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    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, pages 1-28.
    2. Martin Feldstein, 2005. "Rethinking Social Insurance," American Economic Review, American Economic Association, pages 1-24.
    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. Gustman, Alan L. & Steinmeier, Thomas L., 2001. "How effective is redistribution under the social security benefit formula?," Journal of Public Economics, Elsevier, pages 1-28.
    6. 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.
    7. 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, vol. 58(3), pages 483-504, September.
    8. 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, pages 669-700.
    9. Martin Feldstein, 2005. "Rethinking Social Insurance," American Economic Review, American Economic Association, pages 1-24.
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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

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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