From the Left: OK, Real Wages Are Growing
I know that my short-term memory isn't very good (a result of my Y chromosome, by my wife's explanation) but I could have sworn that the big issue in the last election from the left (beyond the war of course) was the indictment that real wages were not increasing -- i.e. that the average worker's wages were growing more slowly than inflation.
Now, this hypothesis was mostly bullshit, particularly when you factored in benefits with wages, but economic facts have never stood in the way of a little populist class demagoguing. However, now it appears that when push comes to shove, no one on the left really believed any of it.
The other day, Kevin Drum posted this:
At the Democratic debate yesterday, Tom Vilsack
proposed a slow reduction in future Social Security benefits by
switching from wage indexing to price indexing
A number of folks, most on the left, called it a really bad idea. Drum himself didn't have a definitive opinion, but seemed to think the idea at least screwy. Why? Well, these folks all thought that a shift from wage to price indexing would reduce benefits, and in fact that is what Vilsack thought -- he proposed it as a way to help close the future cash flow gap in Social Security. Am I understanding this right? Because the only way that this switch could reduce benefits would be if wages were growing faster than prices! Surely I must be missing something? Do we really have a bunch of Democrats all criticizing a plan because everyone universally assumes wages increase faster than prices? Doesn't this contradict their whole meme in the election?
So I followed a link in one of these posts to the Center for Budget and Policy Priorities (I don't know how they would describe themselves politically, but looking at their body of work on the home page, you won't confuse them with Cato). Apparently, this re-indexing scheme was also proposed by GWB (I missed that) and this site was criticizing his plan because it would reduce benefits. And yes, there was the key line (emphasis added):
Under current law, initial Social Security
benefits for each generation of retirees grow in tandem with average wages in the economy. This ensures that each generation receives Social Security benefits that reflect the living standards of its times. Full "price indexing" would make a change in the Social Security benefit formula so that initial Social Security benefits would keep pace only with prices, rather than wages, from one generation to the next. Because prices increase more slowly than wages, this would result in progressively larger benefit reductions over time
There you have it. Democrats and the left criticizing a plan because they assume wages go up faster than prices, so re-indexing from wages to prices would reduce benefits. In fact, the folks I read accept this fact as so fundamental, everyone just assumes it to be true. Is this wildly hypocritical or what?
Brandon Berg:
Good catch. I had the same thought when I read Drum's post. There is one way to resolve this dissonance, though: Argue that CPI understates inflation, and that wage growth is greater than CPI growth, but less than or equal to the "true" rate of inflation.
February 23, 2007, 4:47 pmMesa EconoGuy:
The Center on Budget and Policy Priorities is a liberal think tank, advocating on behalf of labor unions, so-called low- and moderate income families, and other liberal victim groups.
They are staffed by ex-bureaucrats, many displaced by elections (1994, 2000), who actively develop viewpoints designed to re-employ them.
Their economic “analyses†are not to be taken seriously.
February 23, 2007, 5:26 pmDan:
It's a matter of standard of living. Rising wages in general are caused by two factors. The first is inflation, the second is rising worker productivity. It is the productivity portion of the increase that allows for an increasing standard of living.
By indexing benefits to wages, the system allows people who are by definition not productive to receive the benefits of productivity gains in other parts of the economy.
Whether that is good or bad is a question of policy, not economics, but it seems to me that it's undesireable when the average retiree is less likely to have a poverty-level income than the average worker.
February 24, 2007, 10:07 amMichael Sullivan:
You're also missing something critical. Benefits will be reduced/increased based on the *mean* wage (for those under the cap), while the complaints have been about the *median* wage. Nobody on the left denies that the top half of the middle class and the rich are doing quite well in the last few years (once the bust bottomed out), it's everybody else. To some (only some) extent, they are right. Median wages were relatively stagnant from 2001-2005. They didn't go down, of course, but they didn't really go up either. And they did go up in 2006 despite slower GDP growth, so it's not like the working class is on the path to ruin that is often painted. But it is foolish to deny that the top 20% has seen almost all of the wage growth in the last six years.
February 24, 2007, 12:00 pmBrandon Berg:
Dan:
Not really. Your benefits aren't indexed to average wages. They're indexed to *your* wages. Some formula based on your average wages over the last 35 years before you retire* determines your initial benefit level. Once you retire, your benefit level is indexed to cost-of-living. So productivity gains after you retire don't get you anything (except lower prices on manufactured goods).
*It's a heavily front-loaded formula, designed such that contributions to Social Security have sharply diminishing marginal returns in terms of benefits.
February 24, 2007, 12:04 pmDaublin:
You're right. I had paid attention to both of these issues but not put them together until you mentioned it. I have not seen anyone seriously arguing other than in the quote you made: price-indexing causes social security to pay out less. I have heard a number of people trying to argue, though, that median wages have sat still, and presumably that they will continue to sit still Unless Somebody Does Something.
February 26, 2007, 3:00 pm