Why is Obama attacking Social Security?

The Chained CPI proposed by President Obama would limit increases in Social Security, disability and veterans benefits on the grounds that recipients could offset increases in prices by lowering their standard of living.  That is the definition of the Chained CPI.   It is a CPI that will not keep up with the increases in prices measured by the standard Consumer Price Index.  Since income tax rates also are tied to the Consumer Price Index, switching to the Chained CPI would also be a middle-class tax cut.

ClassWarKitteh_catfoodNote also that Social Security benefits are linked to lifetime earnings, which for most citizens are not keeping up with inflation, so future retirees are going to have a tougher time even if the President does nothing.

Obama said his purpose is to induce Republicans in Congress to accept his budget and tax proposals, but the Republican leadership has not asked for this and is likely to use this as a political weapon against Obama and the Democrats.  It would be an effective weapon for the GOP.  Why, then, does the President want to cut Social Security?  Why is so much of the Washington establishment in favor of it?

While I can’t read their minds, I can think of two reasons why they might.  One reason is political and the other financial.

The political reason is that so long as Treasury bonds are held by the Social Security trust fund, that portion of the national debt is off-budget.  The federal government owes about $16 trillion to holders of Treasury bonds, but the $2.5 trillion held by the Social Security trust fund and $4 trillion held by other government trust funds are off-budget.

As soon as the Social Security Administration starts to sell those bonds to private investors, the national debt will appear to increase, even though the only thing that changes is that the debt is held by private citizens instead of for the benefit of American senior citizens.

Recall that Social Security taxes were increased and the full-benefits retirement age raised for 65 to 67 back in 1983 to create a surplus, which is intended the retirement benefits of the baby boom generation were covered.   That surplus was invested in Treasury bonds.  While the Social Security administration is paying out more in benefits than it is collecting in taxes, it still is accruing interest on its Treasury bonds.  But it will soon have to start cashing in those bonds in order to cover its obligations.

The economic reason that financiers might object to this is that putting Treasury bonds on the market will decrease the price of bonds, which is the same as increasing the interest on bonds.   Many other interest rates are pegged to the interest rate on U.S. government bonds, so, all other things being equal, this would mean an overall increase in interest rates.  An increase in interest rates makes bonds a better investment compared to stocks.  In other words, drawing down the Social Security trust fund would tend to depress the stock market.

I don’t think the effect would be trivial.  One of the things that has generated the current stock market boom is that most savers can’t earn interest on their bank accounts or money market funds.   Investors are forced to take a risk if they want to increase their holdings

I have two moderate suggestions:

  • Have the Federal Reserve System create money to buy Treasury bonds from the Social Security trust fund, just as it is now creating money to buy “toxic assets” from the big Wall Street banks.   The Fed could hold or extinguish the bonds, so the financial markets would be unaffected and the national debt would actually be lowered.
  • Index the cap on income subject to Social Security taxes to the Consumer Price Index to keep Social Security solvent for the long-term future.

Click on the following links for more

10 Facts Obama Doesn’t Want You to Know About His Social Security Budget Slashing Plan

Like Nixon to China, it takes a Dem to first knife Social Security

Obama’s “Catfood” Social Security Reform

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