President Obama is using the debt ceiling talks as an excuse to reduce Social Security benefits—even though Social Security adds not one cent to the national government’s debt.
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The method by which this would be accomplished would be to index Social Security benefits to something called the “chained Consumer Price Index” which would go up at a slower rate than the regular Consumer Price Index. This could lower the annual income of the average retiree by small amounts year by year, but the cumulative amount would be large—nearly $1,000 a year by age 85, nearly $1,400 a year by age 95.
The idea of the chained CPI is that people adapt to higher prices by changing their habits, and so their actual cost of living does not go up at as fast a rate as actual prices. This is different from the “substitution effect,” which is incorporated into the regular CPI—that if the price of beef goes up, but the price of chicken does not, then people will switch to chicken and this affects their cost of food. (This illustrates the principle. I don’t know if it is an actual example.)(This is an actual example) The chained CPI takes into account not only substitutions of products, but changes in lifestyle. If you take a “staycation” instead of a regular vacation, your cost of living doesn’t rise with the cost of travel. (I’m not sure if this is an actual example).
The problem with this is that the budgets of elderly people are not so flexible. Even the regular CPI does not reflect the cost of living of the elderly. A couple of years back, the Bureau of Labor Statistics created a new index called the “Consumer Price Index–Elderly” or CPI-E, which reflected out-of-pocket expenses for medical care, drugs, special diets and other costs specific to the elderly. What the bureau found was that the CPI-E index rose twice as fast as the regular CPI. So Social Security increases already fall short of the actual cost of living of the elderly, and the Chained CPI would cause them to fall behind even more.
Cutting Social Security benefits would not reduce the national debt one cent. Social Security has its own revenue stream, and the Social Security Administration is currently drawing down a surplus accumulated in prior years to meet its current payments. By most estimates, the Social Security Administration will be able to meet its obligations with no change in benefits or taxes for at least 25 years.
If Social Security benefits are cut and Social Security taxes remain the same, the Social Security Trust Fund will continue to buy U.S. Treasury bonds, and these bonds will still be a fiduciary obligation of the government, whatever retirees get or don’t get.
It is becoming apparent that this is not a concession by President Obama to conservative Republicans in order to get a deal. It is a “reform” he had in mind all along. I hope that what Howard Dean called “the Democratic wing of the Democratic Party” can block it. If the Democratic Party cannot defend even core New Deal programs such as Social Security, what purpose does it serve?
Click on Ripping Off Needy Seniors Through the Chained CPI for analysis by Michael Hiltzik in the Los Angeles Times.
Click on Gang of Six Plan Reduces Social Security Benefits By $1,300 A Year for analysis of a “compromise” deficit reduction plan by Marie Diamond of ThinkProgress. The Gang of Six are Democratic Senators Mark Warner, Dick Durbin and Kent Conrad and Republican Senators Saxby Chambliss, Mike Capo and Tom Coburn.
Click on What’s In A Name? Dems Support Social Security Benefit Cut—By Calling It Something Else for an analysis on the Talking Points Memo web site.
Click on Debt deal could cut Social Security for a report in the Chicago Sun-Times.
Click on Debt Ceiling Deal Could Mean Social Security Cuts for political analysis in U.S. News and World Report.
There is an older plan for cutting Social Security which is not now on the table, but may come up again in the future. It, too, is a bad idea. Cost-of-living increases for retirees are based on the CPI, but the starting benefits upon retirement are based on average wage rates, which historically have gone up faster than the CPI. Some conservatives have proposed indexing the starting benefits to the CPI. I think this would be wrong, because it would cut retirees out of any rise in the American standard of living. If such a plan had been in effect since the beginning of Social Security, my retirement income would have been a fraction of the salary of the average newspaper reporter in 1940 or thereabouts.
Remember: Under the present CPI formula, retirees have not received an increase in Social Security benefits in the past three years.
[Added 7/24/11] Click on Statistical Wonkery and Grandma’s Social Security Check for Kevin Drum’s comment for Mother Jones magazine.
[Added 7/24/11] Click on Consumer Price Index Frequently Asked Questions for the Bureau of Labor Statistics explanation of how the CPI is calculated.
[Added 7/24/11] Click on Chained Consumer Price Index Frequently Asked Questions for the Bureau of Labor Statistics explanation of how the Chained CPI is calculated.
Tags: Chained CPI, Obama, Retirees, Social Security, Social Security cuts
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