NPR's Matthew Miller Touts Individual Accounts and Price Indexing

October 22, 2003

In his latest book, "The 2 Percent Solution," Matthew Miller, well-known liberal commentator for NPR, says that he is open to the idea of individual accounts and strongly supports price indexing as a way to fix Social Security 's financial problems. He exposes what he calls Social Security's "Three Great Myths" and suggests indexing benefits to prices rather than wages to decelerate scheduled increases.

Miller introduces Social Security as a system on an unsustainable course: "The question of how to manage and finance Social Security and Medicare once the boomers retire remains the $25 trillion question, because that's the amount of unfunded promises that exist in these programs today … The system is hurtling toward an explosion of red ink … Beyond eye-glazing numbers, fears of 'insolvency,' and reckless rhetoric on all sides, Social Security's dilemma will soon prompt the renegotiation of a social commitment in which every American has a hefty financial and moral stake.

"Today's troubles are the legacy of 70 years not only of undisputed gains, but of pervasive myths and unintended consequences that the defenders of Social Security's chastity prefer to ignore."

Miller lists what he calls Social Security's "Three Great Myths."

1. "You're just getting back what you paid in. The average one-earner couple retiring in 1960 got back 11 times what they paid in … By the early 1980s…that average couple had to scrape by on four times what they paid in. People retiring in 2000 will still receive 1.2 to 1.4 times their contributions. But many boomers retiring in 2010, and the bulk of the Generation X'ers who come after, will face lifetime losses.
2. "Social Security is progressive. This fact—that Social Security is regressive within generations—is not well understood.
3. "It's OK, there's a trust fund. The Social Security trust fund is an accounting fiction. While it is true that about $100 billion more comes in today via Social Security taxes than gets paid out in benefits, that "surplus" is immediately invested in Treasury bonds."

Next, Miller explains the origin of the unsustainable scheduled benefits: "In the late 1970s, benefits were tweaked … to rise automatically in tandem with real wages, thus promising each successive cohort of retirees higher real benefits. All told, in the 1970s benefits grew ten times faster in real terms than did the number of Americans aged 65 and over.

"The 'replacement rate'—a measure of the share of preretirement earnings replaced by Social Security—jumped from 34 percent in 1970 to 54 percent in 1981. This spiral brought the system's finances to the brink of crisis, prompting the big bipartisan fix of 1983. Those reforms raised payroll taxes, taxed benefits for the first time, and trimmed future costs by inching the retirement age toward 67 between 2003 and 2025."

Miller offers a solution: "In simple terms, here's what needs to be done. Today, initial Social Security benefits are calculated as a percentage of a worker's average monthly earnings over his or her career. To update those earnings into present-day dollars, they are 'indexed' by the increase in average wages in our economy since that time. The other way to update those earlier earnings would be to index them to the change in economy-wide prices. Since wages rise faster than prices over time (because wages reflect no only inflation but also the increased productivity…), the wage-indexed number is higher, and so initial benefits based on that calculation are higher, too.

This is not cutting benefits, as opponents to reform accuse. Miller writes: "Under wage indexing, every new cohort of retirees is guaranteed a higher level of real benefits in retirement than the previous generation. For example, the typical worker scheduled to retire in 2020 is scheduled to receive monthly payments 20 percent higher in real terms than today's retirees. … A change from wage indexing to price indexing would mean that every new cohort of retirees will get benefits with purchasing power at least equal to what retirees get today (and probably a little higher, since we wouldn't phase it in for a few years).

Miller concludes his Social Security fix: "It would be much better if we make changes to Social Security sooner, so people have time to adjust their expectations and plans. If young people became a constituency for reform it could speed things up. This isn't a brief for 'generational war,' but at this point, a little generational self-defense wouldn't hurt."

In his book, Miller argues that a change to price-indexing benefits would solve Social Security's major problem: insolvency. However, Michael Tanner, director of the Cato Institute's Project on Social Security Choice, argues that setting Social Security on a solvent course is only half the job. See "'Saving' Social Security Is Not Enough" for more information.

2005 Index | 2004 Index
2003 Index | 2002 Index | 2001 Index
2000 Index | 1999 Index | 1998 Index