“With the country facing some $48 trillion in unfunded obligations for its Social Security and Medicare entitlement programs, current taxpayers, as well as generations hence, have much more vexing problems than whether Social Security cost-of-living adjustments (COLAs) are based on the current Consumer Price Index or the ‘chained CPI.’” William P. Hoar
Social Security Is Stricken: A COLA Tweak Won’t Cure It
William P. Hoar, The New American, May 20, 2013, p. 41-43
With the country facing some $48 trillion in unfunded obligations for its Social Security and Medicare entitlement programs, current taxpayers, as well as generations hence, have much more vexing problems than whether Social Security cost-of-living adjustments (COLAs) are based on the current Consumer Price Index or the “chained CPI.”
While there are legitimate arguments to be made over the importance and legitimacy of making this technical change, what is at issue is the possibility that future recipients of Social Security would find that their benefits would increase by 0.3 percent less than they might as currently projected. To do this would throw generations into poverty! Or so we are supposed to believe;
In actuality, the left wing of the Democrat Party is concerned that it could lose leverage in potential budget negotiations b# virtue of the fact that the president made a gesture akin, barely, to some proposals pushed by some Republicans. Whether this is good or bad for the country or the economy is one thing; whether it is good or bad politics is more important to many politicians.
The Washington Post in mid-April focused on this “less generous measure of inflation to annual increases in Social Security benefits.” (For the sake of this discussion, disregard the fact that an increase in the cost of living is not the same as inflation — which is an increase in the supply of money and credit that can cause prices to rise.) Using the chained CPI, over the long run, “would save enough to wipe out as much as 20 percent of the program’s 75-year funding gap,” noted the Post.
The 20-percent figure, from the long-range actuarial balance of Social Security, is taken from the 2012 Social Security Trustees report. The Congressional Budget Office has concluded that the adoption of the chained CPI would save $127 billion over a decade. While that sounds substantial, it doesn’t measure up to the program’s growing deficits — about $45 billion in 2012 alone, and expected to reach $349 billion (in 2012 dollars) by 2032.
Many Democrats would rather run ads saying their Republican opponents want to throw Granny over the cliff rather than resolve the problem. Their worry is that the president’s move, meager though it was, might dilute that message or have such attacks turned on them.
The possibility of using a chained CPI has been discussed in such bodies q.s the Bowles-Simpson Commission, which dealt with fiscal responsibility and debt reduction. However, as was pointed out in the Post, “Obama’s decision to include it in his formal budget request — and House leaders’ decision to hold hearings with the hope of drafting bipartisan legislation — is plowing new ground.”
Social Security and other entitlements need more than a fix around the edges. David C. John, a senior research fellow in retirement security and financial institutions at the Heritage Foundation, who does see value in moving to the chained CPI, notes that the Social Security Administration itself acknowledges that the program has been running deficits since 2010, and the program
owes $11.3 trillion more in benefits over the next 15 years than it will receive in payroll taxes. In order to pay all of its promised benefits, Social Security will require massive annual injections of funding in addition to what the program receives from payroll taxes.
Social Security’s trust fund gives it the legal authority to receive general tax money to pay its benefits until about 2032. However, general revenue funds used to pay Social Security benefits would not be available to pay for anything else. That is why Social Security is part of the spending debate. And after 2032, Social Security benefits would be cut by about 25 percent.
In other words, without real reform, the problem will get much bigger.
While some Democrats see a political advantage in being identified with Social Security, other prominent members of the party have recognized the program’s structural weaknesses. Former New York Senator Daniel Patrick Moynihan was not shy about pointing out that the Trust Fund was being misrepresented (he called it in essence a box that contained only IOUs); he railed against the fact that it was raided for other government spending, which he referred to as “outright thievery.”
Former South Carolina Democratic Senator Ernest Hollings similarly warned about the so-called securities in the Trust Fund. On October 13, 1989, he said, “In the next century … the American people will wake up to the reality that those IOUs in the trust fund vault are a 21st century version of Confederate bank notes.” That future has now arrived, though many
Democrats (and Republicans) refuse to wake up and admit it.
Even the 2000 budget during the Clinton administration acknowledged that these Trust Fund balances are available to finance future benefit payments and other Trust Fund expenditures — but only in a bookkeeping sense…. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits.
The fund, in short, is bogus. Others1 less blunt, refer to it as a polite fiction — though the damage it has caused is hardly a courteous gesture. The fund has, meanwhile, served to hide the size of the federal deficit — since the government borrows from it to pay its operational expenses. Then it replaces the funds with government bonds — in essence, IOUs.
The fact that the left wing of the Democrat Party is angry at the president, however, doesn’t mean that he has accidentally done something right, as one might imagine. He is just being a bit more surreptitious in his pretenses at economy, by attempting to give the impression that he is willing to consider aspects of a GOP plan. After all, his budget is widely seen as dead on arrival. Virtually no one expects him to “cut” Social Security without squeezing more out of the taxpayers.
In addition, as has been noted by economic analyst Dan Mitchell, the president’s overall budget “whiffs on entitlement reform,” not even taking a stab at Medicare or Medicaid, as the House budget does. Obama, writes Mitchell, “would slightly reduce cost-of-living adjustments for Social Security, but that would be a substitute for the reforms that are needed to both control costs and give workers the option to boost retirement income with personal accounts.”
Use of the chained CPI doesn’t mean that the country would save the exploding entitlement problem. More properly, it should be viewed as a tax increase. The chained CPI would would trim Social Security and other federal benefits, but they are tied to the rate of “inflation.” Each year, the percentage tax brackets are adjusted upwards by the “inflation” rate. If they were tied to the chained CPI, they “would adjust upward more slowly using the chained CPI, meaning higher taxes,” as was noted recently by U.S. News & World Report. According to the CBO, using the chained index would produce a $340 billion swing in deficits in a decade, or about $127 billion in lower Social Security COLA payments, some $38 billion in other federal COLAs, around $51 billion in estimated deficit reduction, and an increase of $124 billion in federal taxation.
As Chris Edwards of the Cato Institute put it in 2011, the chained CPI would create a “large tax increase over the long run. And it would be an invisible annual tax increase on families and voters because there would be no obvious changes in their tax forms.”
The discussion over this technical correction also tends to draw attention away from an even larger matter — that of the huge increase in the number of Americans receiving disability payments from the Social Security program. Few in Washington seem willing to make an issue of this, lest they be viewed as attacking the disabled. But there is more involved here than an aging population and a fragile economy.
Writing in Forbes for January 14, 2013, Richard Finger observed: Since Obama entered the White House in January of 2009 and September 2012, 5.9 million people have been added to the SSDI or Social Security Disability program. That compares with less than 2.5 million jobs created during the same period. According to Social Security Administration data, currently including spouses and children, SSDI rolls have swollen to a bloated 10.9 million. A record one in fourteen workers is now on the SSDI dole. It’s like checking in a hotel and never leaving.
Of the 653,877 souls thai departed the program in 2011, 36% departed by being gracious enough to die, while 52% reached retirement age and seamlessly switched to other benefits. Only 6% returned to work and 3.6% exited the program due to medical improvement. According to the Congressional Research Service, this program cost . taxpayers $128.9 billion in 2011 and was in deficit to the tune of $25.3 billion. Funded by the 1.8% payroll tax and comprising nearly 18% of all Social Security spending, at current pace the trust fund may be exhausted by as early as 2015.
In 2011, the federal government spent almost $250 billion to pay about 16 percent of the workforce for some type of declared disability. Yet, as CNNMoney also reported in April, the program that is administered by Social Security is within two or three years of running out of money.
When last we looked, 2016 was an election year — not generally the high season for politicians to make courageous or even common-sensical decisions. Eventually, this disability spending situation will force politicians, reported CNNMoney, “to either cut Social Security benefits, raise taxes or, most likely, dip into general Social Security funds for the money.”
Those general funds, of course, are already bleeding red — because of generations of over-promising politicians who have exhibited the gift of grab. They continue to make pledges they cannot deliver. At the same time, they wish we would forget earlier guarantees. For example, when Social Security was being started, the federal government published a pamphlet that declared outright about Social Security taxes: “And finally, beginning in 1949, 12 years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.”
Jump ahead following decades of lying. The latest report of the Board of Trustees of the Social Security trust funds concludes there is a $20.5 trillion shortfall. In fact, that total represents more money than Social Security has taken in over all the years since its creation, as has been pointed out by MarketWatch, a Dow Jones subsidiary.
Trie angst generated by even discussing the possibility of making a small change in cost-of-living increases for Social Security recipients does not augur well for the chances of more comprehensive reforms or alternatives. ■
— William P. Hoar