In 1977, President Carter proposed that Social Security benefits be indexed, not to the price level as had been the case, but to wages. Because real wages tend to rise, this wage indexing would be expected to cause Social Security spending to rise faster than otherwise. Someone who understood this at the time was recently designated Nobel Prize winner Peter Diamond.

In a speech he gave in 2005 while he was chairman of President Bush’s Council of Economic Advisers, Greg Mankiw quoted from a May 1977 letter to the New York Times opposing wage indexing. Diamond co-authored it with James Hickman, William Hsiao, and Ernest Moorhead. They wrote:

the wage indexing method calls for a much larger growth in benefits for future retirees at a time when the country may not be able to afford it….Only a Social Security system without a large deficit on the horizon can have the flexibility to deal with this and other needs. It would be sad if the legacy of a particularly forward-looking President were a political nightmare.

Unfortunately, Carter got his way and we are now living that nightmare.

HT to Glenn Hubbard and Peter Navarro