A guide to entitlement reform

• Social Security. The consensus in Washington is that the retirement program ought to be decoupled from the fiscal negotiation and fixed so that it is sustainable by itself for the next 75 years. Fine, but this still means slowing the growth of benefits and making Social Security a supplement to private saving, not a substitute.

Currently, Social Security’s cost-of-living adjustment is determined by the rise of average wages, which wasn’t carved in stone by FDR. The formula was created in the 1970s and overstates the rate of inflation and thus increases real benefits substantially over time.

Changing monthly payments to grow with prices, not wages, would resolve 75% of Social Security’s financial problems. A version of this change called “progressive indexing” developed by Democratic financier Robert Pozen would slow the increase in future benefits for the most affluent seniors, while lower-wage workers would be held harmless.

This reform is far superior to the other idea on the table—simply replacing the wage formula with the “chain-weighted” consumer price index, which adjusts for how people change their buying habits when prices change. Some Republicans think chain-CPI is all they can get, and it is better than nothing.