Post-entitlement benefits under the rules applicable between 1973 and 1978 were also
adjusted by changes in the CPI-W. The major difference from current law was in the calculation
of initial benefits. From 1973 to 1978, earnings histories were not indexed in calculating the
average monthly earnings, but the marginal benefit rates use to calculate the PIA were
adjusted by changes in the CPI-W. These features, along with wage indexation of the
contribution base, became “automatic” with the 1972 Social Security Amendments (modified
by two Amendments in December 1973). The indexation of marginal benefit rates also created
potential financing problems for the program. As long as the index used to adjust benefit rates
is increasing, the average replacement rate—the ratio of initial benefits to final wages—will
eventually increase. Given the levels of wage and price growth that prevailed in the mid-70s,
replacement rates actually increased very rapidly under this scheme. This “overindexation” —
which existed independent of any bias in the CPI—was corrected by the 1977 Amendments
(effective for retirees born after 1916), which changed the way initial benefits are calculated so
that replacement rates would stabilize. As we demonstrate below, the CPI bias has its largest
impact on pre-1977 law beneficiaries, since it caused an upward drift in initial replacement
rates.