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Low Inflation Hurts Social Security Financing

April 23rd, 2009 . by economistmom

Doug Elmendorf, the director of the Congressional Budget Office, explains (on his blog) how one aspect of the currently-weak economy, low inflation, will adversely affect the actuarial balance in the Social Security, by in some sense artificially holding down the size of the taxable income base:

The absence of COLAs will affect payments of Social Security taxes and the base for calculating benefits for new beneficiaries because it will affect the maximum amount of wages that are subject to Social Security, known as the taxable maximum. The Social Security Act specifies that the taxable maximum increases only in years in which a COLA occurs. Thus, under CBO’s forecast, that maximum will be frozen until 2013. At that time, the contribution and benefit base will increases by the change in the national wage index since the last time a COLA was triggered. Following those current-law rules, CBO anticipates the base will hold steady at $106,800 for 2009 through 2012, and then jump to $118,200 in 2013, reflecting the cumulative change in the national wage index during the period of no COLAs.

Kind of surprising to me, that that’s how the tax max works.

And Andrew Biggs somehow got a hold of these CBO charts (which don’t seem to be on the CBO website) that paint a broader picture of how the weak economy is adversely affecting Social Security.

2 Responses to “Low Inflation Hurts Social Security Financing”

  1. comment number 1 by: Tim

    That’s only because the government spends beyond its means. Otherwise, inflation would simply ADD to the surplus, rather than detract from the “acceptable” level of deficit.

    Yet another reason why our government needs to severely shrink and we need to cut spending. Currently, the government has incentive to create more inflation simply because it allows them to spend more.

    It’s almost like if you took a loan for your house, and then allowed the market to inflate so that you didn’t have to pay for it.

  2. comment number 2 by: Jason Seligman

    TaxMax aside, adjusting to any change in inflation expectations, up or down is potentially unplesant, but inflation is a bigger problem in as much as it impacts the value of private stores of wealth that seniors rely on. That wealth has taken a beating lately, and with interest rates as low as they are right now a really double whammy for new annuitants would be to lend a low rates (through the annuity contract) and then get paid back with devalued dollars.

    There is more to seniors’ welfare than the tax max. Low inflation is not a bad thing, lets hope for more of the same. And speaking of seniors again, lets hope for an expansion of this particular “problem” to medical inflation.