Chained CPI, the Donor Class and Social Security
Cutting Social Security is unpopular, bad policy, and bad economics. But the president’s 2014 budget, released today, acquiesces to conservative demands for entitlement reform by adopting the innocuously titled chained CPI growth measure for Social Security, a proposal that would hurt the already dwindling capacity of older Americans to retire with decent living standards.
The argument that Social Security is insolvent rests upon politically expedient but economically spurious claims. The Social Security trust fund, which has been fully funded through payroll taxes, will run a mild deficit. But that deficit is just the manageable consequence of an aging population.
Chained CPI is a cut to Social Security payments. The assumption of the switch from CPI-W (the current measure) to chained CPI is that we're mismeasuring inflation. Dylan Matthews at WonkBlog has an excellent explanation of the impact:
That adds up to a big cut in Social Security benefits. Imagine, for example, a person born in 1935 who retired to full benefits at age 65 in 2000. According to the Social Security Administration, people in that position had an average initial monthly benefit of $1,435, or $17,220 a year. Under the cost-of-living-adjustment formula and 2012 inflation, that benefit be up to $1,986 a month in 2013, or $23,832 a year. But under chained CPI, the sum would be around $1,880 a month, or $22,560 a year. That’s a cut of over 5 percent, and more as you go further and further into the future
On top of all of that, Dean Baker notes that both measures may be understating inflation, "as seniors devote a much larger share of their income to items that have risen faster than the overall CPI, specifically health care and housing."
The impact of reverting to chained CPI is decidedly regressive. Not only does cutting Social Security benefits disproportionately hurt poorer seniors, Matthews finds that chained CPI will hike taxes the most for "families making between $30,000 and $40,000 a year. Their increase is almost six times that faced by millionaires."
Obviously, now is not the time to be slashing benefits for retirees.
While Washington projects 30 years into the future, they fail to acknowledge the recent past. Over the past several decades retirement security has collapsed. Since 1980, the availability of private pension plans has fallen from covering 40 percent of private sector workers to a mere 15 percent in 2006. In addition to the collapse of private pensions, the financial crisis ravaged their replacement: defined contribution plans. The financial crisis wiped out $2.7 trillion dollars in the value of 401(k) and IRA plans. Americans retirement needs have been increasing rapidly, particularly among low and middle income sets.
As a result, Social Security is more important than ever.
In the absence of private pensions and diminished returns from defined contribution plans, Americans have begun to rely more and more on Social Security benefits. While poverty rose for every other group during the recession, the program protected the elderly from suffering the same fate. Without Social Security, 19.8 million more Americans would be poor. Further, as Matt Bruenig pointed out yesterday, cash benefit programs ameliorate most concerns of ideological opponents of government: There’s no corruption or waste when the money goes directly to the individual. As an example, Bruenig highlighted that only 0.8% of Social Security expenditures went to administering the program in 2012.
If Social Security remains incredibly popular among voters in both parties, why is chained CPI on the table? This is how the priorities of the rich and politically connected become damaging policy for the majority. New research from Benjamin Page, Larry Bartels, and Jason Seawright provides telling clues. In a pilot study on the top 1% of wealth holders in Chicago, the authors found that not only do the richest Americans contact their elected representatives at an astoundingly high rate, they hold much different opinions about public policy than the rest of us.
That public support recommends the progressive answer to the president's attempt to cut Social Security: Expand it.
And that exactly is what the plan laid out in the New America Foundation by Michael Lind, Steven Hill, Joshua Freedman, and Demos Policy Analyst Robert Hiltonsmith would do. Expanded Social Security presents a clear progressive solution to the president's short-sighted retirement policies.
Here's the impact:
As the authors point out, and the chart above demonstrates, the current system is "biased toward the affluent and skewed towards private savings." In an era of record inequality, we should be making policy more effective and our taxation and benefits more progressive. Expanding Social Security answers both imperatives.