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Watch Out for Pseudo-Liberals Joining the Elites' Attack on Social Security

Liberal attacks on Social Security are the unkindest cut of all.

The Center for American Progress’s Matt Miller has  argued that liberals can learn a valuable lesson from NY Governor Andrew Cuomo’s proposed budget. With his state facing a fiscal crisis, the Governor has proposed to cap growth of state spending on the Medicaid program. Miller has argued that we should follow his example and apply a similar cap to Social Security spending.

Briefly, New York’s Medicaid spending was slated to grow by 13%, much faster than the overall inflation rate. Governor Cuomo has proposed to ignore funding formulas and to limit growth to 6%. Miller wants liberals to follow that example by changing Social Security’s formula used to adjust benefits.

Miller rightly notices that Social Security expenditures are also projected to grow faster than inflation. Of course, some of that is due to our aging society, with more retirees to support. But funding formulas for Social Security also contribute to growth of individual benefits beyond cost of living adjustments. In other words, Social Security expenditures in real terms (after inflation) increase faster than growth of the retired population, meaning that the benefits received in the future by a retiree will be higher in real terms than they are today.

Here’s why. In the 1970s it was recognized that if real living standards rise over time (due to growing productivity of workers), then Social Security retirement benefits would fall behind even if they are adjusted for inflation. Suppose you retired today at age 65 and were fortunate enough to live another 25 years to the ripe old age of 90. Let us say you retire at the typical benefit of $18,000 paid to one who has earned a medium wage pre-retirement. If that benefit is adjusted every year to account for inflation, when you die in 2036 you will still be able to buy the same consumer basket in your last year of life (assuming the COLA adjustments accurately reflect inflation — something that is not really true). But over that 25-year period you will watch as the average American living standard rises relative to your own. You will become relatively impoverished.

Over a period that long, it is likely that living standards will have increased substantially; over the course of US history they have typically doubled each generation. You will have fallen far behind in relative terms — from a not-so-comfortable living standard ($18,000 is by no means extravagant today) to a living standard that is half as good in relative terms.

For comparison purposes, based on current formulas, your Social Security retirement is projected to grow in real terms from that $18,000 now to $24,000 in 2030 and to $29,000 in 2050 (should you be so lucky to live to the age of 104!). Your living standard will grow by 60% as it keeps pace with the growth of American workers’ living standards. In relative terms, you do not fall behind. If everyone else is driving flying saucers to Venetian vacations, you’ll be able to do the same.

There are of course two objections. First, we do not know how much living standards will rise. It will depend on growth of labor productivity. But by linking growth of Social Security benefits to real wage growth we are ensuring that no matter how much productivity grows (whether it is zero or 400 percent), seniors will get their share.

Second, one could argue that in absolute terms, seniors are no worse off if we limit benefit growth to cover inflation. They’ll probably still live better in America than they would in India, after all.

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