Social Security Wage Indexing Revisited

Abstract: This paper examines the long-term impact of Congress’ 1977 decision to wage index initial Social Security benefits. We use the Survey of Consumer Finances to address the question of how senior household incomes and the Social Security Trust Fund’s financial status would have fared had Congress chosen different methods of indexing initial Social Security benefits. We perform a retrospective analysis of two alternative price-indexing methods. The first indexes workers’ prior wage histories to the growth in prices rather than wages. The second method holds constant inflation-adjusted initial benefits for a typical recipient. We find that the objective of the 1977 Social Security legislation—namely, ensuring that seniors’ living standards keep up with the rest of the population—could have been achieved by either price-indexing method. The methods would have only a minor effect on most senior household incomes, but both would have prevented Social Security’s looming insolvency.

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