The 3 Percent Cut to Social Security, A.K.A. the Chained CPI, Means A Cut In Your Lifestyle

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Is there anyone left out there that doesn't realize that the magic words "chained CPI" mean permanent cuts in benefits for which we've already paid?

The 3 Percent Cut to Social Security, A.K.A. the Chained CPI

Monday, 14 January 2013

By Dean Baker, Truthout


(Image: Social Security via Shutterstock)

According to inside-Washington gossip, Congress and the president are going to do exactly what voters elected them to do: they are going to cut Social Security by 3 percent. You don't remember anyone running on that platform? Yeah, well, they probably forgot to mention it.

Of course, some people may have heard Vice President Joe Biden when he told an audience in Virginia that there would be no cuts to Social Security if President Obama got re-elected. Biden said: "I guarantee you, flat guarantee you, there will be no changes in Social Security. I flat guarantee you."

But that's the way things work in Washington. You can't expect the politicians who run for office to share their policy agenda with voters. After all, we might not like it. That's why they say things like they will fight for the middle class and make the rich pay their fair share. These ideas have lots of appeal among voters. Cutting Social Security doesn't.

While the politics of cutting Social Security are bad, it also doesn't make much sense as policy. In Washington, the gang who couldn't see an $8 trillion housing bubble until its collapse sank the economy has now decided that deficit reduction has to be the preeminent goal.

They don't care that we are still down more than 9 million jobs from our growth trend; deficit reduction must take priority. These whiz kids apparently also don't care that the cuts that have already been made are slowing growth and costing us jobs.

If we actually did have to reduce the deficit, it's hard to see why Social Security would be at the top of the list. After all, the vast majority of seniors are not doing especially well right now. Our defined benefit pension system is disappearing and 401(k)s have not come close to filling the gap. Retirees and near retirees have lost much of the wealth they had managed to accumulate when the collapse of the housing bubble destroyed much of their home equity.

From a policy standpoint, it would make far more sense to tax Wall Street speculation. Congress' Joint Tax Committee estimated that a 0.03 percent tax on each trade could raise almost $40 billion a year. Such a tax would also make the financial sector more efficient by eliminating a huge volume of wasteful trading.

It also is bizarre that Social Security would even be considered in the context of the deficit. In law and in practice, it is a separate program, financed by its own designated stream of revenue. Cutting benefits as part of a deficit deal means that we will be making cuts to Social Security with zero quid pro quo in the form of increased revenue. That hardly makes sense if the point is to protect the program.

What's more, the cut in fashion in Washington is especially poorly targeted. The idea is to reduce the annual cost of living adjustment by 0.3 percentage points annually by using a different inflation index. That translates into a cut in benefits of 3 percent for those who have been retired ten years, 6 percent after 20 years, and 9 percent after 30 years. The people who have been retired the longest and are, therefore, the poorest, will see the largest cuts.

And remember those pledges not to cut benefits for those currently retired? Oh right, no one meant that to be taken seriously.

The benefit-cutters' argument is another nice piece of DC humor. The argument is that the current index overstates inflation. However, there is an experimental index produced by the Bureau of Labor Statistics which shows the current index actually understates inflation for seniors.

That is just an experimental index, but if the concern really is accuracy, then the obvious answer would be to construct a full index to examine the cost of living for the elderly. But that suggestion just draws contempt from the Social Security cutters.

In order to avoid feeling too badly about their plan to cut Social Security, many of the cutters want to protect some programs for low-income people. For example, Supplemental Security Income (SSI) a program for the disabled and low-income seniors, will be protected. The word is that SSI will continue to be indexed to the current inflation index.

If we believe the claim that the chained Consumer Price Index (CPI) - which is different from other inflation indexes because it factors in consumers switching to cheaper products when prices go up, thereby measuring a lower inflation rate - is the more accurate measure of inflation, this is a proposal to increase SSI benefits each year by an amount that is 0.3 percentage points more than the annual rate of inflation. That may make sense to inside Washington types, but anywhere else, this is loon tune stuff. If SSI benefits are too low (they are), then raise them. What possible logic can there be to have benefits rise each year by a bit more than the actual rate of inflation?

The bottom line is that President Obama and many leading Democrats are prepared to give seniors a larger hit to their income than they gave to the over-$250,000 crowd. And the whole reason it is necessary is that the Wall Street types who wrecked the economy say so. Is everybody happy?

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout's Board of Advisers.

And before the election, we read columns like the following one.

The CEO Plan to Steal Your Social Security and Medicare

Monday, 30 July 2012 

By Dean Baker, Truthout

Many people are following the presidential election closely with the idea that the outcome will have a major impact on national policy. However, according to Steven Pearlstein, a veteran Washington Post columnist and reporter, it may not matter who wins the election. In a column last week, Pearlstein told readers that the top executives of some of the country's largest companies are getting together to craft a budget package that they will try to push through Congress and get the president to sign.

While Pearlstein clearly sees these backroom meetings of corporate chieftains in positive terms (he refers to them as "grown-ups" who have been noticeably absent from the conversation about the budget), the rest of us might view this plotting a bit differently. As Pearlstein openly acknowledges, this corporate coup is an end-run around the electorate. As corrupt as the political process may have become, at least we will get a vote in the election. Pearlstein's plotters are not inviting the rest of us into the conversation.

Many of the same folks who brought the economy to ruin just a few years ago are now going to come up with a plan that is supposed to set the budget and the economy on a forward path. At the center of their proposal are big cuts in Social Security and Medicare.

The most popular Social Security cut among this gang is a reduction in the annual cost of living adjustment (COLA) by 0.3 percentage points. They are betting that are ordinary people are too dumb to notice this cut since it is a relatively small amount each year.

However, the effect of this cut accumulates into a much bigger deal over time. After ten years, it is roughly 3 percent; after 20 years, it would be close to 6 percent; and after 30 years, it would be close to 9 percent.

If we assume that an average retiree collects benefits for 20 years, this implies an average cut in their benefits of 3 percent. Is that a big deal? Well, there are a lot of would-be Social Security cutters who are screaming bloody murder because President Obama wants to increase the tax rate on a portion of their income by a bit more than 3 percentage points. This means that if President Obama's proposal to increase taxes on the richest 2 percent is a big deal, then the plan to cut the Social Security COLA is also a big deal.

The corporate CEO crew is also considering a plan to raise the normal retirement age for Social Security to 69. And, they want to reduce the benefit formula for high-income workers, which, incredibly, they define as people who earn more than $40,000 a year.

Their main trick for Medicare is to raise the age of eligibility from 65 to 67. Apparently, our CEO gang has not discovered that the health insurance market for older people is a disaster. They also continue to promote the misconception that the problem is Medicare and Medicaid.

These programs are actually much more efficient than private insurers. The real problem is our private-sector health care system which already costs more than twice as much per person as the average in other wealthy countries, with few obvious benefits in outcomes.

The scary budget projections that our CEOs like to tout assume that health care costs will exceed 20 percent of gross domestic product in a decade. That would imply costs of more than $34,000 for a family of four in today's economy. And these costs are projected to keep growing through time.

The normal response to this situation would be to focus on the need to fix the health care system. But many of Pearlstein's CEOs profit from the waste in the health care system, so they would rather cut our Medicare benefits.

So there you have it, the richest people in the country - the big gainers from economic growth over the last three decades - have plans to cut Social Security and Medicare benefits for current and future retirees.

To get some perspective on this story, the typical near retiree has about $180,000 in wealth, including everything, such as the equity in their home, their 401(k) and any other savings. That is what our CEO gang makes in a week. The average Social Security check of $1,200 a month is more than half of the income for two-thirds of seniors and more than 90 percent for one third. Yet, the CEOs think seniors are living too well.

But wait, there's more. We're all paying for their campaign to take away our Social Security and Medicare. We do this through several different channels. 

First, many of these CEO and honcho types come from Wall Street. For example, Erskine Bowles, the co-chair of President Obama's deficit commission, is a director of Morgan Stanley in one of his day jobs. Had it not been for the taxpayers' generosity, the bank that Mr. Bowles directs would have died in the fall of 2008, so it would not be around to pay him his six-figure stipend.

The other way we are paying for this corporate effort to cut our Social Security and Medicare is by virtue of the fact that we allow the CEOs to pay for their campaign with pre-tax dollars. If most of want to give $100 to a political candidate or political cause, we have to first pay taxes on our income and then make the campaign contribution out of what we have left.

However, if you are a CEO who wants to cut Social Security and Medicare, the Supreme Court says you can make your contributions with pre-tax dollars, in effect deducting this contribution as if you were giving money to charity. According to Pearlstein, the CEOs' "charitable" contribution for cutting Social Security and Medicare will be on the order of $278 million.

For most of us, that sum would be real money, but not for CEOs who control trillions of dollars. And with the rest of us subsidizing through our tax dollars this effort to cut our Social Security and Medicare, how can the CEOs not take up Pearlstein's call?