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60 IRET Congressional Advisory 1 (1997)

handle is hein.taxfoundation/iretcgadv0057 and id is 1 raw text is: IET April 28, 1997 No. 60 COLAS NOT THE CAUSE OF SOCIAL SECURITY DEFICITS Cost of living adjustments (COLAs) that are slightly overstated by the much maligned Consumer Social Security Trustees Report, life expectancy at age 65 in 1997 is 15.6 years for men and 19.2 years for women. The Report projects those figure to reach 17.5 and 20.9 years, respectively, by 2040, and 18.8 and 22.3 years, respectively, by 2075. A larger group of retirees will live and draw benefits 16 to 20 percent longer than they do today. The other source of the deficits is the Social Security initial benefit formula. The initial benefit formula sets the benefit check that a retiree receives when he or she begins to draw benefits. The benefit is based on a worker's earnings history - the income on which he or she paid social security taxes over the years. Those yearly earnings are adjusted for wage growth, averaged, and subjected to a complex formula that determines each person's Price Index are not the source of Social Security's looming deficits, and fixing the CPI and the COLAs will not save Social Security from impending collapse. There are two real culprits leading to the projected Social Security deficits. One is an adverse demographic shift as There are two real culprits leading to the projected Social Security deficits. One is an adverse demographic shift ais the baby boom r-etires, life expectancy rises, and the population ages. initial monthly benefit check. The initial benefit formula is independent of the subsequent cost of living adjustments that protect the initial benefit from subsequent inflation. Consequently, changes in the COLAs have little impact on the initial benefits that future generations will receive. (See note.) the baby boom retires, life expectancy rises, and the population ages. Currently there are 3.3 workers paying into the system for each retiree drawing benefits. That ratio will fall to 3 workers per retiree by 2010, 2.0 workers per retiree by 2030, and to 1.8 workers per retiree by 2070. The decline in the ratio stems in part from the impending retirement of the post-World War II baby boom generation, which will be followed into the work force by the baby bust generation. The initial benefit formula is designed to keep benefits growing in line with income, generation after generation, no matter how much income grows over time. The replacement rates (initial benefits upon retirement as a percent of pre-retirement income) are kept constant across all future generations - at about 56% for low wage workers, 42% for average wage workers, and 27% for upper income workers. (See table.) Exacerbating the population shift is a continuing increase in life expectancy. According to the 1997 Per capita real income is projected to roughly double over the next 75 years. Consequently, per Institute for Research on the Economics of Taxation The other sou-ce of the deficits is the Social Security initial benefit fiolm a.... [Pier capita real benefits at the normal retirement age are ... projected to roughly double under- curr-ent benefit fiormulia ruldes between 1997 and 2075. IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 e Fax 202-463-6199 0 Internet www.iret.org

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