Saying goodbye to wage indexing could fix Social Security funding

The solution to the Social Security problem is the elimination of “wage indexing.” But I get ahead of myself.

In management literature, the first step in problem-solving is to define the problem. I believe that the first step is actually to be aware that a problem exists.

The Social Security problem is that projected trust-fund expenditures over the next 75 years exceed projected trust-fund income by approximately 30 percent. The result in the year 2090 is a shortfall of approximately $295 trillion. We have concern about a $20 trillion national debt. Yet we face a Social Security trust-fund deficit of almost 15 times that amount.

Another step that should be added to the management literature is a desire to solve the problem. Even President Donald Trump has promised no changes to Social Security. He thus joins our problem-solvers in the House of Representatives, the Senate, AARP, the National Committee to Preserve Social Security and Medicare, and others who purport to be looking out for longterm interests of the American people.

The problem with a desire to solve the problem is that the trust fund has a current balance of $2.8 trillion and doesn’t go into deficit until the year 2034. Expenses exceed income beginning in the year 2020, with the annual deficit rapidly increasing until the balance in used up. Our problem-solvers seem to expect that FICA taxes will be increased at some later date to cover the financial shortfall. The alternative would be to reduce all Social Security benefits by 30 percent when the trustfund balance goes bust. A solution to the Social Security problem that would not affect current beneficiaries is the elimination of wage indexing in the calculation of new Social Security benefits.

Wage indexing became a part of Social Security benefit calculations in the 1972 amendments to the Social Security Act, which provides for beneficiaries to receive annual Consumer Price Index increases — and for first-year benefits for new retirees to be increased by an index tied to increases in wage levels: the wage index.

The wage index is a Bureau of Labor Statistics index distinct from the more familiar CPI, and which historically has increased at a greater rate than the CPI. As an example of the impact of wage indexing, a person retiring in 1995 at age 66 with annual earnings exceeding FICA limits would receive a monthly benefit of $1,220, which would grow with CPI increases to $1,900 a month in 2015.

Compare this with a person retiring in 2015 at the age of 66 with comparable wages. That person would receive a monthly benefit of $2,663 — a difference of $763, or 40 percent.

In the 2016 Social Security Trustees Report, the CPI was projected to increase by 2.6 percent annually, while average benefits with wage indexing were projected to increase by 3.8 percent. The difference of 1.2 percent is what will cause the trust fund to be depleted within 20 years and, by 2090, go into the red by $295 trillion.

The answer is to return Social Security to its original intent as a safety net. Elimination of wage indexing will save the program without affecting benefits of any current recipient, by reducing benefits to new recipients at a very slow rate. That should provide sufficient time for those recipients to recalculate and reset their retirement plans. It would also eliminate any need for increasing FICA taxes, or increasing retirement ages, or means testing, or use of a different CPI, or whatever other proposed remedies, including that drastic plan of a 30 percent reduction in all Social Security benefits.

Your letters to senators and representatives could make this happen.

Daniel M. Conway is an engineer and worked for several private utilities, including Arizona Public Service Co., Southern California Gas and Southern California Edison, before retiring. Email him at arizconway@msn.com.