More Progressive Ways to Reduce Social Security Spending than Chained CPI

Dylan Matthews has a great post discussing more progressive cuts to social security than Chained CPI.  He includes the option of altering the Preliminary Issuance Amount, which is determined by a benefit schedule that maps  your “average wages” into a personalized social security check every month. The idea of reforming PIA schedules in a progressive way is to lower top benefit rates and effectively reduce the amount that high “average wage” seniors get every month. A more detailed description of how this works and how “average wages” is defined are below the fold.

Finally, note that in some sense this benefit schedule is already quite progressive since the top rate is only 15%. However, it’s important to remember that higher income people also tend to live longer, so they will be getting these benefits at 15% for longer periods of time.

First, your salaries for the 35 years (or less, if you didn’t work for 35 years) in which you earned the most money are averaged, leaving out any income above the Social Security cap. This is your “average indexed monthly earnings” (AIME) figure. Then the government does a weird reverse tax procedure, starting with a high benefit “bracket” and then moving to a low one. If your AIME is less than $791 a month, then your primary insurance amount is 90 percent of your AIME. If your AIME is between $791 and $4,768, insurance  90 percent of $791 plus 32 percent of your earnings over $791. If it’s over $4,768, then it’s 90 percent of $791 plus 32 percent of $3,977 — the difference between $4,768 and $3,977 — plus 15 percent of earnings over that.

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About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
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