The latest deficit-cutting proposal in the fiscal cliff negotiations has seniors up in arms. President Barack Obama and House Speaker John Boehner have agreed to a new measure of inflation that would reduce annual cost-of-living adjustments, or COLAs, for Social Security and other government programs.
The new measure is called the chained consumer price index (CPI). If adopted, it would have far reaching effects because annual adjustments to many government programs are based on year-to-year changes in consumer prices.
The change is another assault on the once sacrosanct middle-class safety net. According to the Congressional Budget Office, Social Security payments would be $108 billion less over 10 years with chained CPl.
When certain products become more expensive, consumers switch to cheaper ones. Chained CPI attempts to account for that by looking at purchasing changes over time and linking, or chaining, the data together. For example, if beef prices rise faster than chicken prices, consumers will substitute chicken for beef.
So chained CPI takes spending changes into account, not just the price of goods. Nearly every conversation about using chained CPI is based on the notion that market exchanges are always voluntary, the products equivalent and that the elderly use the same goods as other Americans. They ignore how much more seniors spend on health care, the cost of which is increasing at an alarming rate.
Under chained CPI, annual increases in Social Security payments, government pensions and veterans’ benefits would, on average, be reduced by about 0.3 percentage points annually. For example, next year’s 1.7 percent COLA would be about 1.4 percent.
Changes to ·Social Security are politically delicate because the program touches so many people. Nearly 56 million people -one out of every six Americans -receive Social Security benefits. The program accounts for about 20 percent of the Federal government’s $3.7 trillion in spending.
The average annual retiree benefit is $14,800. Those with lower wages get less and those who had higher wages get more; even Warren Buffett gets a Social Security check.
It is estimated that nearly half of Americans 65 or older would be below the poverty line if not for Social Security; a quarter of the elderly get at least 90 percent of their income from the program. Given their standard of living, many retirees are already making onerous trade-offs.
For a long time, there was more money coming into the Social Security Trust Fund then going out. The surplus was turned over to the Treasury, which promptly spent it.
Still, the Trust Fund is sound until 2036. So why is Social Security even part of the fiscal cliff negotiation? It is not driving the deficit. The gap going forward between revenue and expenditures for Social Security does create problems over the long run, but they are manageable.
If we really want to protect Social Security, remove the $106,800 income cap that results in less than 86 percent of wages being subject to the payroll tax. Economists estimate that taxing incomes over $106,800 would entirely eliminate the projected Social Security shortfall over the next 75 years.
Other common-sense reforms include reducing or eliminating benefits for the wealthy and raising the retirement age to reflect longer life expectancy.
Still better, subject investment gains to the payroll tax. Hedge fund managers’ earnings are taxed at the capital gains tax rate of 15 percent instead of being treated as ordinary income taxable at 35 percent.
All these reforms could be phased in over 20 years. Finally, we have to make Social Security a real trust fund, insulating it from Washington politicians who raid it and use the money for other programs.
These are the adjustments politicians should be considering, not technical tweaks in the cost-of-living formula that are not widely understood and are easily manipulated.
We face trillion-dollar annual deficits and total debt of more than $16 trillion. But the Washington political class is talking about $2.4 trillion in new revenue and spending cuts over 10 years.
Clearly there is much to be done, but we shouldn’t do anything to Social Security right now. That should work because the folks in Washington are awesome at doing nothing.
originally published: December 29, 2012