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The Effect of Using Price Indexation Instead of Wage Indexation in Calculating the Initial Social Security Benefit

Social Security today is facing a long-term deficit. In its 2002 Report, the Social Security Board of Trustees estimates that in 2017, the program's income will fall below its outgo, and by 2041, its trust funds will be depleted. At that time, income from FICA taxes and taxes on benefits will be able to pay approximately 73 percent of benefits. In this AARP Public Policy Institute Data Digest, Alison Shelton, Laurel Beedon and Mitja Ng-Baumhackl examine the substitution of price indexation for wage indexation in the calculation of workers' initial Social Security benefits, a reform offered by the President's Commission to Strengthen Social Security as part of a plan to make the program solvent for the long term. The PPI research shows, while this change would significantly reduce Social Security's long-term deficit, it would significantly reduce future benefits and fundamentally change the relationship between workers' contributions and the benefits they receive. (9 pages)