The wage increases mean that newer beneficiaries get a bigger pension than their predecessors, even after adjusting for inflation. Thompson was suggesting that we base the formula upon inflation alone. Then every pensioner gets what his big brother or sister did, adjusted for inflation. But not more.
Now, as to indexing, here's what happens if you don't adjust for rising living standards. Nominal wage indexing (as is done now) accounts for both changes in inflation and changes productivity over time (see the %Δ equation above), whereas price indexing only adjusts for price changes, it makes no allowance at all for changes in living standards (i.e. for changes in productivity).
True but we need to add one bit to this. Ms. Shlaes is not comparing what my son will receive when he retires some 45 years from now to what my daughter will get when she retires. Fred Thompson’s proposal will make sure that my kids get no more than I get even though they are likely to earn more over their lifetime than I did. Which means they will pay more into the Trust Fund than I did. Yet, they are supposed to get no more than their dad got? Is Amity Shlaes too stupid to understand this? If so, why is Bloomberg giving her a column?