Tuesday, February 01, 2005

More Luskin

DeLong explains in more detail just why exactly higher productivity improves the fiscal situation in the trust fund and is not, as Luskin claimed, just a wash.

To understand this, it's important to remember that only initial benefit levels are pegged to the wage index, so it only impacts the first year of SS benefits. Benefit increases in subsequent years are pegged to the CPI. However, the FICA cap impacts the potential taxes paid by the entire working population (those who are at or above the cap). An increase in the wage index lifts revenues fairly substantially, while increasing per capita SS benefits by not very much.

Let's say the current FICA cap is at $100,000. If the wage index goes up by 10%, then the cap goes up to $110,000. This means that anyone who earns between 100-110K income (and their employer) now has to pay taxes on that income. How does a big 10% jump in the wage index impact total social security payouts? It increases the real benefits of new retirees by 10% over the previous year's but leaves everyone else's benefits (everyone who retired earlier than the current year) untouched. So, the average social security benefit is not changed very much.

Luskin's claim was that increases in productivity/wages were a wash because wages *and* benefits go up about one for one. This just isn't true.