The U.S. has some systems in place that virtually guarantee fiscal trouble in the event of an economic downturn. A lot of government expenses, e.g., Social Security and public employee pensions, are adjusted for inflation, which is no longer necessarily related to the ability of American workers to pay higher taxes.
A few decades ago, when a smaller percentage of the U.S. economy was exposed to the world market, the current system of CPI adjustment might have made sense. It was tough for prices to rise without U.S. wages to rise since almost everything that we were buying came from within the U.S.
Today, however, prices for a lot of important items are determined by worldwide demand. For example, oil can become much more expensive and boost the cost of living even if Americans aren’t consuming more oil. The products we buy may get more or less expensive depending on the prices of labor and materials in China.
The ability to pay for programs such as Social Security and pensions for retired government workers depends on the level of private sector wages as well as the number of private sector workers. Why not therefore add some built-in stability to the system by adjusting pensions and Social Security to median private sector hourly wages rather than inflation? If typical working Americans are able to pull ahead of inflation, non-working citizens can share in the fruits of their success. If typical working Americans slip behind inflation due to worldwide economic forces beyond our control, non-working citizens will suffer a comparable reduction in lifestyle.
Right now an external inflation shock, such as a rise in oil prices, has a destabilizing effect on the U.S. economy because a lot of government expenses are automatically increased while the tax base to pay for those expenses may actually be shrinking.
Well, they use the mean rather than median, but you will be happy to hear that SSA does exactly that! http://www.ssa.gov/OACT/COLA/AWI.html
Andy: http://www.ssa.gov/OACT/COLA/latestCOLA.html seems to indicate that CPI-W is used to figure how much flows out.
While your suggestion makes sense at first reading, it does rise the issue of a substantial political pressure to bomb the living whatever out of anyone increasing the cost of products in the US. I actually believe that waging war for money is pretty reasonable and honest way of doing things, but, how do you factor war expenses in the equation?
Thats the current difficulty with social security, not the solution.
Your base social security pension calculated at age 66 is based on wage-inflation corrected salary history. Wage inflation has been higher than the consumer price index for the past 30 years, believe it or not.
Wage inflation her http://www.ssa.gov/OACT/COLA/awiseries.html has been 254% 1979-2009. CPI inflation is ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt 198% the same period.
Peter: Thanks. I guess it is a good thing that I wasn’t on that fancy commission that recently delivered its report! Perhaps there is simply no way for an economy to remain internationally competitive with its current workers being taxed to support a large group of retirees plus unlimited procedures and drugs in the world’s most expensive health care system. That would be an inconvenient truth indeed.
In a future world with many pensioners and few workers it is still possible that paying a pension of say half median wages still results in a tax bill that takes all the workers wages. What kind of indexation scheme is most robust against time and chance? I think it should be indexed against net wages, that is wages after tax.
For example, if the demographics change and the ratio of pensioners to workers rises, taxes will have to rise to pay the pensions, cutting the net wage and cutting the rate of the pension. That shares the pain around and corresponds to the particular vision of fairness behind the original proposal.