Social Security’s Five OASI Inflation Indexing Problems

This paper examines five problems with the inflation indexing procedures used by the Social Security Administration in taking inflation into account when calculating Old Age and Survivors Insurance (OASI) Benefits. Several of these problems have capricious distributional consequences. For example, as a result of Problems #2 and #4 your OASI check will be larger if wage inflation happens to be extra high in your 60th year or if price inflation is exceptionally low in your 61st year. And because of Problem #1, the size of the benefit increase you will receive if you elect to postpone retirement and the start of OASI benefits depends in part on the pace of inflation. While indexing problems do not attract much attention in normal times, they can contribute to serious short-run financial instability for the OASI trust funds in periods of substantial inflation.