Saturday, April 13, 2013

Why Chained CPI is so incredibly stupid- Social Security

Like most people that live outside of the DC Beltway, I also think President Obama's plans to include Chained CPI in federal payments for programs such as Social Security is foolish economically, and politically idiotic. On an economic level Social Security HAS WORKED when it comes to keeping the elderly out of poverty. As the Center on Budget and Policy Priorities estimated in 2010, the numbers of elders in poverty would be 5 times higher if not for Social Security.

Reducing these benefits, even with the "haircut" that Chained CPI would allow for, puts seniors in even more danger, when they're already at great peril when it comes to their financial security. The Washington Post's Harold Meyerson did a great breakdown a month ago explaining how many of the former comforts older people had in retirement have diminished, or gone away entirely.
A 2011 survey by the Society of Actuaries reported that 55 percent of working seniors said they had stayed employed because they wanted to stay active and involved. But the same survey showed that 51 percent were working because they needed the money.

What advocates for reducing Social Security adjustments fail to consider is that corporate America’s shift away from defined-benefit pensions to defined-contribution 401(k) plans — or to no retirement plans at all — has diminished seniors’ non-Social Security income and made the very idea of retirement a far more risky prospect. Today, more than half of U.S. workers have no workplace retirement plan. Of those who do, just 35 percent still have defined-benefit pensions. In 1975, 88 percent of workers with workplace retirement plans had defined-benefit pensions.

The shift from traditional pensions to 401(k)s is one of the main reasons most seniors aren’t able to set aside enough income to guarantee a secure retirement. A 2010 survey by the Federal Reserve found that the median amount saved through 401(k)s by households approaching retirement was $100,000 — not nearly enough to support those households through retirement years, as seniors’ life expectancy increases. And as most Americans’ wages continue to stagnate or decline, their ability to direct more of their income to 401(k)s diminishes even more.
With this in mind, it shows Social Security benefits are needed more than ever for our seniors, and should be the last place to cut if you have any concerns over our deficit. Especially when you consider Boomers and Gen Xers have worked in a time where wages have declined as a percentage of GDP for the last 40 years.

THAT'S one of your main problems with Social Security funding- fewer people working (especially in the last 5 years) and getting less pay for their work, both of which rob Social Security of needed revenues. Add to that the cap on earnings in a time where the income of 1%ers have exploded (you aren't taxed another dime for Social Security after $113,700 in income for 2013, and you pay nothing on capital gains or dividend income), and you can see where there are issues on the revenue side.

So if we're concerned about the long-term viability of Social Security, why aren't we asking about a fairer tax system that would increase the revenues available to pay benefits? And why aren't we concentrating on job and wage growth that would increase Social Security's availability of funds? Instead the DC Bubble (Obama included) is fixated on the deficit.

This is especially stupid when THE DEFICIT ISN'T A MAJOR PROBLEM RIGHT NOW. It's been nearly cut in half from the last Bush budget that ended in September 2009, and we already have had deficit-cutting moves this year with the increase in employees' Social Security taxes back to 6.2%, higher taxes on the rich, and the sequester in March. The Congressional Budget Office has indicated those moves would cut the deficit in half again over the next 2 years, down to $430 billion. And the markets sure don't seem to think we have a debt problem. The U.S. 10-year note is on its lowest interest rates in the 5 years that we've had these large deficit.

If our deficits were a real economic problem, and we truly had a debt crisis, this chart would be reversed, because the U.S. would have to offer higher interest rates to entice investors to buy. This is clearly not happening, and it screams out for added investment to get people back to work over cutting benefits and slowing the economy down.

Lastly from the economic side, SOCIAL SECURITY IS NOT CAUSING OUR DEFICITS. Even in the relatively gloomy pictures given that the Social Security Administration tends to give, they admit that Social Security is still reducing our current deficit, not adding to it, and that if we did absolutely nothing for 20 years, there would be enough money to keep things as they are, because there are literally trillions of dollars available in the Social Security trust fund, and that the fund will keep growing for several years.
In 2011, Social Security’s cost continued to exceed both the program’s tax income and its non-interest income, a trend that the Trustees project to continue throughout the short-range period and beyond. The 2011 deficit of tax income relative to cost was $148 billion and the projected 2012 deficit is $165 billion. The sizes of these deficits are largely due to a temporary reduction in the Social Security payroll tax for 2011 and 2012. (this reduction is now over, and we are again taking in more money to Social Security vs. payouts). The legislation establishing the payroll tax reduction also provided for transfers of revenues from the General Fund of the Treasury to the trust funds to "replicate to the extent possible" revenues that would have occurred in the absence of the payroll tax reduction. Including these general revenue reimbursements, the 2011 deficit of non-interest income relative to cost was $45 billion and the projected 2012 deficit is $53 billion.

The combined Social Security trust funds continue to grow because projected interest earnings ($110 billion in 2012) still substantially exceed the non-interest income deficit. The report indicates that annual OASDI income, including payments of interest to the trust funds from the General Fund, will exceed annual cost every year until 2021, increasing the nominal value of combined OASDI trust fund assets. As noted earlier, however, the trust fund ratio (the ratio of projected assets to costs) will gradually decline despite this nominal balance increase, as it has since 2008.

Beginning in 2021, net redemptions of trust fund assets with General Fund payments will be required until exhaustion of these assets in 2033. After OASDI trust fund exhaustion, continuing tax income would be sufficient to pay 75 percent of scheduled benefits in 2033 and 73 percent in 2086.
OOOOH! We might have to reduce benefits by 25 percent in 20 years if we don't adjust revenues or increase the amount of Americans working. Well, maybe we can do something about that, can't we? How about having an extremely small percentage of the huge corporate profits or capital gains we've been seeing go toward those who worked their ass off for 40 years to earn Social Security? And how about changing our tax system to encourage hiring and wage growth over profit hoarding and gambling on Wall Street? Whaddya say?

And oh yeah, in addition to being dumb, DC bubble-world economics, it's also politically stupid for Obama to ask for Chained CPI. Why in the world would you want to give Republicans any opening to cut the bedrock program that is one of the defining positions of the Democratic Party, and a huge reason why Democrats have been able to position themselves in the minds of some voters as the party that still tries to care for the little guy? Instead, including chained CPI forces Democrats in Congress to choose between backing a Democratic president or staying true to the prinicples of the party and opposing the President (and still possibly being brought down in a "guiilt by association" GOP attack). Especially with the Congressional GOP being about as popular as dog food right now, with a clueless, incoherent economic policy of "never raise tax revenues for anything but never name what you're going to cut," why give these guys any cover?

Sure, I've heard the "11-dimensional chess" theory that this forces Republicans to go further with cuts, or sputter about and look foolish, leaving the Democrats in Congress to be the ones to save the day and keep Social Security from being cut, helping Dems in the future. But the cynicism of that type of thinking is disgusting to begin with, and I'm betting the average citizen doesn't really care about the political game-playing as much as they're worried that they're going to have less to live on in their golden years because of Chained CPI. And since "Democrat Obama" is the guy who proposed cutting Social Security benefits in his budget, that'll be what a lot of them remember, even if it never becomes law because of the efforts of Dems in Congress (which hopefully it never does).

Then again, given this moves and others (including AG Eric Holder admitting that his department finds some banks "too big to jail"), it seems likely that Obama isn't working for the Dems or the Republicans, but instead the 1%-ers. After all, the 1%-ers stand to gain from cutting Social Security, as it leaves the working classes even more destitute and dependent on the largess of the ruling class, allowing the cycle of increasing inequality to continue. Which means we have to oppose this stupid economic policy as loudly and outwardly as we can. Not only to send the message that any gutless Dem that goes along with this crap will have their career ended as a serious player in the party, but also to stem the tide that has screwed the vast majority of Americans for the last 40 years. It has to end now.


  1. So if nothing is done, Social Security will have a cashflow issue 20 years hence, needing 33% more income than it will have in order to maintain benefits.

    This is obviously contributed to by two things:

    1. Rising income inequality. In Reagan's time the initial target was for SS taxes to be applied to 90% of total wages, and they were. Now that fraction is only 83% because more of it has shifted up the scale and beyond the cap. If incomes had not become so unequal, SS's revenue stream would be 8% higher than it is now.

    2. Total wages as a fraction of GDP have dived from 53% of GDP in 1970 to 44% in 2010. If they had not been eaten away like that, Social Security revenue would be another 20% higher than it is today.

    Those are multiplicative, so we're looking at SS revenue that today would be 31% higher had it not been for rising inequality. The Trust Fund would be exploding rather than growing today, far more than sufficient to provide the 2% extra interest income to cover any 2033 gap in cashflow with zero changes to benefits. Growing inequality is the ONLY reason why we're not discussing how much to raise SS benefits by while keeping payroll taxes the same.

    Also, if the average person's wages had been 31% higher they'd no doubt be in a much better position to save for their retirement as well.

  2. "Growing inequality is the ONLY reason why we're not discussing how much to raise SS benefits by while keeping payroll taxes the same."

    DING! DING! DING! We got a winner.

  3. Also, Social Security is not causing our deficits because Social Security is not causing out *debts*.

    Currently the total Federal debt is $16,808,067,104,144.06.

    What no meganumerophobes have ever explained is how this would change by a single penny if Social Security (holder of about $2.8 trillion of that) had never existed. Debt requirements don't change if the list of who is in the lending business changes.

    The reason many people are confused about Social Security and the federal deficit is because of the unified budget which has counted Social Security's cashflow as federal revenue since the days of LBJ. The unified budget is how Clinton could claim surpluses even though Federal borrowing went up slightly; it is how GWB claimed $250 billion deficits in years that the debt went up by $500 billion. It is dishonest when SS cashflows are positive, and it is similarly dishonest to suggest that SS will contribute to the deficit in future if its cashflows are negative.

    All else being equal, the only thing that happens when SS's cashflow is negative is that Federal debt to it is replaced by debt to other creditors in a 1:1 ratio with zero change to the total.