Alternative Methods of Price Indexing Social Security: Implications for Benefits and System Financing

This paper explains four methods of "price indexing" initial Social Security retirement benefits, and discusses the effect of each method on the fiscal sustainability of Social Security, benefit levels and replacement rates, redistribution, and sensitivity of system finances to demographic and economic shocks. Of these methods, Primary Insurance Amount (PIA) Factor Indexing would generate the largest cost savings while reducing benefit growth at approximately an equal rate for all income levels. Methods that index the Average Indexed Monthly Earnings (AIME), the formula "bend points," or both, would reduce benefit growth at a slower rate and would have different effects on benefit distribution and system sustainability.