Policy Features of Social Security That Drive Its Long‑Term Costs
Social Security’s financial challenges are often framed as the inevitable result of an aging population. Demographics matter, but policy choices built into the design of the program also impact costs. Two structural features of the program — both largely invisible to the public — quietly push costs higher every year. And some of the proposed reforms to cut costs in the program would adjust these features.
Adjusting the Calculation of Initial Benefits Would Slow the Growth of Social Security
Social Security sets a new retiree’s initial benefit by adjusting that worker’s past earnings using the National Average Wage Index (wage indexing). That means past pay is boosted not just for inflation but to reflect overall wage growth, so each new generation of retirees typically starts with higher benefits – even after adjustment for inflation – than the previous one. After benefits begin, annual cost of living increases (COLAs) follow price inflation (the CPI).
Because wages usually grow faster than prices–over the past 35 years average annual growth of wages has been 3.7% compared to 2.8% for prices–switching the initial‑benefit calculation from wage indexing to price indexing would slow the growth of starting benefits over time. In plain terms:
- Wage indexing raises past earnings by average wage growth, so new retirees’ starting checks tend to rise with living standards.
- Price indexing would raise past earnings only by inflation, so starting benefits would keep pace with prices but not with rising wages — freezing purchasing power across cohorts.
What that would do to the program
- If price indexing began for new beneficiaries in 2029, it would close roughly 80% of Social Security’s 75‑year funding gap under standard actuarial estimates (see page 6, option B1.1).
- A progressive price‑indexing approach — for example, exempting workers at the 30th percentile and below while applying price indexing to higher earners — would close about 44% of the long‑term funding gap while shielding lower‑income retirees from most cuts.
Who would be affected
- Full price indexing would gradually reduce replacement rates (benefits as a share of pre‑retirement earnings) for future retirees; reductions grow larger the farther into the future you look.
- Progressive variants protect many low‑earners but still could end up reducing some auxiliary (spousal or survivor) benefits, so some low‑income individuals — especially women who rely on auxiliary benefits — could see modest cuts even under shielding options.
COLAs Use an Inflation Measure That Does Not Reflect Consumer Behavior
After a retiree begins receiving benefits, Social Security adjusts payments each year using the Consumer Price Index for Urban Wage Earners (CPI‑W), an inflation index designed to measure price changes for urban wage earners. Behind the scenes, the indices used to adjust Social Security benefits are hotly contested.
Many economists view CPI‑W as overstating inflation, because it doesn’t accurately capture how consumers substitute cheaper goods when prices rise. For example, recently ground beef prices have surged by more than 50% since 2021. As a result, many households have shifted to purchasing lower priced ground turkey or chicken.
Arguably, because CPI‑W grows faster than other measures of inflation, some analysts argue that benefits rise more quickly than retirees’ true cost of living. Over time, this compounds into substantial additional Social Security benefits — not necessarily because retirees need more, but because the formula overshoots.
Switching to an alternative measure of inflation, such as the chained CPI which accounts for consumers substituting cheaper goods when prices rise, would address 17% of the Social Security shortfall.
Why These Two Features Matter for Solvency
Individually, wage indexing and CPI‑W COLAs each subtly push Social Security’s costs upward, in different ways.
- Initial benefits grow faster than inflation, due to wage indexing.
- Ongoing benefits tend to grow faster than inflation (as measured by many other metrics), due to the use of the CPI‑W.
Wage-indexing reflects a policy choice focused on ensuring the Social Security benefits maintain a recipient’s standard of living, not just keep up with price changes. This policy choice increases the long-term cost of the program.
The use of the CPI‑W dates to 1975, when it was the best available measure for automatic cost‑of‑living adjustments (COLAs). Since then, inflation measurement has improved and newer indexes, like chained CPI, are widely believed to be better metrics because they reflect how consumers switch between different types of goods in response to price changes.
