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Idea: Peg Social Security To Productivity

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The government might be able to improve the solvency of Social Security and increase benefits payments by basing future growth partly on changes in productivity.

John Sabelhaus and Julie Topoleski, researchers in the Congressional Budget Office, make that suggestion in a new CBO working paper.

The problem with the current reform strategy, which would respond to increases in retirees’ life expectancy by sharply decreasing benefits payments, is that there is still a high probability that Social Security could become insolvent and an equal probability that the program could be too stingy and end up accumulating too much cash, the researchers write.

If officials tied Social Security payments at least partly to productivity, then payments could rise faster than inflation when productivity growth was higher than expected without hurting program solvency, the researchers write.

Basing increases solely on longevity would force officials to cut benefits 20% immediately to keep the Social Security trust fund from imploding, while using a productivity-based approach would reduce the required benefits cut to 5%, the researchers estimate.

“The modest 5% initial cut for near-term retirees seems both more acceptable and more distributionally neutral than current law,” the researchers write.

A copy of the paper is on the Web at Document Link