ruth marcus

Well, who can blame her? After all, we have tens of millions of seniors living high on Social Security checks averaging a bit over $1,200 a monthat a time when folks like the CEOs in the Campaign to Fix the Debt are supposed to subsist on paychecks that typically come to $10 million to $20 million a year.

Anyhow, her main trick for cutting benefits is to adopt the chained consumer price index as the basis for the annual cost of living adjustment. This would have the effect of reducing benefits by 0.3 percentage points for each year of retirement. This means a beneficiary would see a 3 percent cut in benefits after 10 years, a 6 percent cut after 20 years and a 9 percent cut after 30 years. This is real money. Since Social Security is more than half the income for almost 70 percent of retirees and more than 90 percent of the income for 40 percent of retirees, the hit to the affected population would be considerably larger than the hit to the top 2 percent from ending the Bush era tax cuts.

But Marcus insists this cut must be done first and foremost in the name of accuracy, since the chained CPI is supposed to provide a better measure of the cost of living. She notes but quickly dismisses the evidence from the Bureau of Labor Statistics (BLS) consumer price index for the elderly (CPI-E), which shows that the rate of inflation seen by the elderly is somewhat higher than the overall rate of inflation.

The problem with that is twofold. That measure is imperfect — the “E” stands for experimental. And, as the liberal Center on Budget and Policy Priorities notes, the burden of higher health costs falls unevenly among the elderly. Average costs are skewed upward by a minority who face very high out-of-pocket expenses, a problem better addressed by fixing Medicare to deal with catastrophic costs.

Actually, the “E” stands for elderly, but let’s get to the substance. First, if we are interested in accuracy then the answer would seem to be to have the BLS construct a full elderly index that tracked the actual consumption patterns of the elderly. This would cost some additional money, but we will be indexing $10 trillion in Social Security benefits over the next decade so if we want to ensure accuracy, it would seem reasonable to spend $70-$80 million to put together a full elderly index that actually tracked the consumption patterns of the elderly, looking at the specific outlets where they shopped and the items that they purchased.

It is difficult to know exactly what this would show, but it is possible that even apart from the issue of health care it would show that the elderly experience a higher rate of inflation than the population as a whole. The current index already assumes substantial amounts of substitution in response to price changes at lower levels of aggregation (e.g. different types of cell phones). If the elderly are less flexible in their shopping patterns and a less mobile population then this substitution may have the effect of understating the increase in their cost of living.

The point about health care misunderstands the way the consumer price index is calculated. The index is an average index, which weights expenditures by dollars rather than households. While the health care case may suggest that a small minority is pulling costs up, it is also likely that a small minority is pulling costs down. The vast majority of the population does not buy a new car in a given year. Yet this item, which has barely risen in cost over the last decade according to the BLS, accounts for more than 3 percent of the weight of the index.  This means that new car purchases by a small and relatively wealthy segment of the population have had the effect of reducing the measured rate of inflation over this period.

This issue arises with many other items as well. The BLS makes a point of quickly including new items (e.g. the latest cell phone or tablet computer) in the index to capture their period of most rapid price decline. Since these items will generally be expensive when they are first introduced, they will disproportionately be consumed by wealthier households and likely under-consumed by the elderly.

This provides reason to believe that the CPI understates the cost of living of the typical household and especially the typical elderly household, but Marcus is only interested in finding reasons why there might be an overstatement. There is also the obvious point with health care which is that most elderly households in most years will not have large health care expenses, but that doesn’t mean that at some point in their retirement that most elderly households will not see large health care expenses. That is the point of an index that picks up averages.

Marcus’s argument that this is:

a problem better addressed by fixing Medicare to deal with catastrophic costs,” is intriguing. When exactly do we anticipate that Congress is going to fix Medicare to deal with catastrophic costs?

The story here is pretty simple. If we want a more accurate index for adjusting Social Security benefits then we would have BLS construct a full elderly index. If the point is to cut benefits then we would do what Marcus advocates and switch to a chained CPI. That will teach those high living seniors.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.

Photo by Dyson under Creative Commons license

President Obama with: Rob Nabors, Assistant to the President for Legislative Affairs; Jeffrey Zients, Acting Director of the Office of Management and Budget; and Chief of Staff Jack Lew

Thoughts on the Chained CPI, Social Security, and the Budget

According to reliable sources, the Obama administration is seriously contemplating a deal under which the annual cost of living adjustment for Social Security benefits would be indexed to the chained consumer price index rather than the CPI for wage and clerical workers (CPI-W) to which it is now indexed. This will lead to a reduction in benefits of approximately 0.3 percentage points annually. This loss would be cumulative through time so that after 10 years the cut would be roughly 3 percent, after 20 years 6 percent, and after 30 years 9 percent. If a typical senior collects benefits for twenty years, then the average reduction in benefits will be roughly 3 percent.

There are a few quick points worth addressing:

1. The claim that the chained CPI provides a more accurate measure of the cost of living;
2. Whether Social Security benefits are now and will in the future be sufficient to allow for a decent standard of living for retirees; and
3. Whether this is a reasonable way to be dealing with concerns over the budget.

This are taken in turn below.

Is the Chained CPI More Accurate?

While many policy types and pundits have claimed that the chained CPI would provide a more accurate measure of the cost of living for seniors, they have no basis for this claim. The chained CPI is ostensibly more accurate for the population as whole because it picks up the effect of consumer substitution as people change from consuming goods that increase rapidly in price to goods with less rapid price increases.

While this is a reasonable way to construct a price index, it may not be reasonable to apply the consumption patterns and the substitution patterns among the population as a whole to the elderly. The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index (CPI-E) which reflects the consumption patterns of people over age 62. This index has shown a rate of inflation that averages 0.2-0.3 percentage points higher than the CPI-W.

The main reason for the higher rate of inflation is that the elderly devote a larger share of their income to health care, which has generally risen more rapidly in price than other items. It is also likely that the elderly are less able to substitute between goods, both due to the nature of the items they consume and their limited mobility, so the substitutions assumed in the chained CPI might be especially inappropriate for the elderly population.

While the CPI-E is just an experimental index, if the concern is really accuracy, then the logical route to go would be for the BLS to construct a full elderly CPI. While this would involve some expense, we will be indexing more than $10 trillion in Social Security benefits over the next decade. It makes sense to try to get the indexation formula right.

Are Social Security Benefits Adequate?

Read the rest of this entry →

The Serious People are after your social security.

The Very Serious People have taken off the gloves. There are no rules when it comes to the battle over Social Security and Medicare as Brooks Jackson shows in his “FactCheck” on the use of the chained CPI to index the Social Security cost-of-living adjustments (COLA).

Jackson strongly endorses the use of the chained CPI, describing it in the first sentence as “a more accurate cost-of-living adjustment.” The chained CPI would have the effect of reducing the annual COLA by approximately 0.3 percentage points. This reduction would be cumulative (e.g. 3 percent after 10 years, 6 percent after 20 years), leading to an average cut in lifetime benefits of approximately 3 percent for the typical beneficiary.

To push his case, Jackson seriously misrepresents the evidence. There is reason to believe that a chained index provides a better measure of inflation, since it takes account of the substitution between goods. However, the Bureau of Labor Statistics (BLS) has been producing an experimental elderly index (CPI-E) for almost three decades, which has generally shown a somewhat more rapid rate of inflation that the standard CPI currently being used to index Social Security benefits. The CPI-E would imply that the current COLA has been underadjusting for inflation, not overadjusting.

Jackson notes the CPI-E, but dismisses it as:

an unpublished, ‘experimental’ index

He then cites BLS’s warning that:

any conclusions drawn from it should be used with caution.’ BLS also concedes that the CPI-E has a number of shortcomings because it simply re-weights the price data collected for its regular price surveys, without attempting to collect some important data specific to seniors.

Given that this experimental index has shown evidence that the elderly see a higher rate of inflation than the population as a whole, it would seem that anyone concerned about having an accurate measure of the rate of inflation experienced by the elderly would want to see the BLS construct a full CPI-E. In fact, several hundred economists recently signed a statement calling on BLS to construct such an index. This would be the obvious route to go for anyone interested in an accurate index for the inflation adjustment of more than $10 trillion in Social Security benefits over the next decade.

Read the rest of this entry →

David Brooks offers Democrats the worst tax deal ever.

It’s fascinating to read David Brooks’ column today. He boldly argues that Republicans:

have to acknowledge how badly things are stacked against them. Polls show that large majorities of Americans are inclined to blame Republicans if the country goes off the ‘fiscal cliff.’ The business community, which needs a deal to boost confidence, will turn against them. The national security types and the defense contractors, who hate the prospect of sequestration, will turn against them.

Moreover a budget stalemate on these terms will confirm every bad Republican stereotype. Republicans will be raising middle-class taxes in order to serve the rich — shafting Sam’s Club to benefit the country club. If Republicans do this, they might as well get Mitt Romney’s “47 percent” comments printed on T-shirts and wear them for the rest of their lives.

Recognizing their weak position, he says that Republicans should be prepared to allow the top tax rate to rise to 36 or even 37 percent, but in exchange:

Republicans should also ask for some medium-size entitlement cuts as part of the fiscal cliff down payment. These could fit within the framework Speaker John Boehner sketched out Monday afternoon: chaining Social Security cost-of-living increases to price inflation and increasing the Medicare Part B premium to 35 percent of costs.

Excuse me, but what planet is David Brooks on? This would be comparable to Japan asking for Hawaii and parts of California as it was negotiating its surrender in World War II.

If nothing happens right now, the top tax rate goes to 39.6 percent on January 1, 2013. Let’s say that again just in case David Brooks is reading. If nothing happens right now, the top tax rate goes to 39.6 percent on January 1, 2013. There is nothing that John Boehner and the Republicans can do to stop this.

Furthermore, President Obama has a mandate to raise the top tax rate to 39.6 percent. Brooks probably missed this, but we just had a lengthy election campaign where taxes on the rich were the central issue. President Obama won.

Incredibly, Brooks’ proposal for “medium size entitlement cuts” would take a much bigger bite out of the income of retirees than his bold concessions on taxes would take out of the income of the rich. The cut to the cost of living adjustment would reduce lifetime benefits of seniors by around 3 percent. For the third of retirees that rely on Social Security for more than 90 percent of their income, this would be a cut in their income more than 2.5 percent.

In addition, Brooks want to raise Medicare Part B premiums by 10 percentage points of the total cost from 25 percent to 35 percent. With the per person cost projected to be average almost $6,000 a year over the next decade, this “medium size entitlement reform” would raise the cost to seniors by $600 a year. This is equal to 3 percent of the income of a senior with an income of $20,000, a figure that is somewhat higher than the median for people over the age of 65.

So Brooks is looking to cut the income net of Medicare expenses for the bottom half of Social Security and Medicare beneficiaries by almost 6 percent. And, his tax increases?

We don’t know exactly how Brooks would change the tax schedules, but let’s assume that the 35 percent bracket goes to 37 percent, Brooks’ higher number. And we’ll raise the 33 percent bracket to 35 percent. For a couple earning $500,000 a year, this would imply an increase in taxes of roughly $7,600 a year or 1.5 percent of their income.

So Brooks is proposing that as a starting offer (he wants bigger cuts on the table in the year ahead) moderate income seniors will see their income drop by 6 percent due to cuts in Social Security and Medicare, while the wealthy will see their income fall by 1.5 percent from tax increases. It’s interesting to think aboout what he would suggest putting on the table if the Republicans had won the election.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.

Photo by the Miller Center released under a Creative Commons License.

It’s amazing what you can learn reading the Washington Post. Today its lead editorial told readers that reducing the annual cost of living adjustment for Social Security by 0.3 percentage points won’t hurt. This would come as news to most seniors who rely on Social Security for most of their income.

This 0.3 percentage point cut is cumulative. After a person has been retired for 10 years benefits would be roughly 3 percent lower than would otherwise be the case. Benefits would be almost 6 percent lower after 20 years, and almost 9 percent lower after 30 years, when most beneficiaries will be in their 90s.

The poverty rate is highest for the oldest seniors, most of whom are women living alone. Most people think cutting benefits for this group by 9 percent would hurt, thankfully we have the Washington Post to tell us otherwise.

(This is a newspaper that has run front page stories warning that raising taxes by less than 1 percent [of income] on people earning $300,000 a year would inflict real pain.)

The rationale for the benefit cut is the use of an alternative measure of inflation, the chained consumer price index, that assumes substantial substitution between consumption items in response to prices changes. The Post asserts that this index is a more accurate measure of inflation.

Actually, the Bureau of Labor Statistics has an experimental elderly index that measures the rate of change in the basket of goods and services consumed by people over age 62. This index shows that the inflation rate experienced by the elderly increases by an average of 0.3 percentage points more than the overall CPI to which Social Security benefits are indexed.

While this is an experimental index that does not track the actual purchasing patterns of the elderly (e.g. examining the specific retail outlets where they shop and the items they purchase), those who are interested in an accurate cost of living adjustment would advocate a fuller elderly index. Those who want to cut Social Security benefits advocate using the chained consumer price index, which we know will show a lower measured rate of inflation.

"Fetch!" says Peterson. (photo: Noviewsnocomments via Flickr)

Okay folks, it looks like the whole country is now playing Peter Peterson’s budget ball. For those not familiar with him, Peterson is a Wall Street investment banker. He has made billions of dollars through his dealings and government subsidies, and now he is using much of this money to accomplish a lifelong quest, gutting Social Security and Medicare.

Toward this end, he has set up a fake news service (the “Fiscal Times“); he’s funded scary, anti-Social Security documentaries; sponsored a set of rigged public forums (America Speaks) and even paid for the construction of a high school curriculum to indoctrinate school children. According to some accounts, he is now the largest employer in the DC area after the Pentagon.

The way Peterson’s budget game works is that you get some deficit or debt target. This is against a backdrop where the baseline projections show the deficits going through the roof in 10-20 years. The reason for the exploding deficit is the projection of exploding health care costs. The US would be looking at massive budget surpluses if it had the same per person health care costs as any other wealthy country.  . . . Read the rest of this entry →

photo: AFL-CIO via Flickr

The insiders in Washington really really want to cut Social Security, and they are prepared to say or do anything to do it. Among the latest lines is that they want to make Social Security more “progressive.” This sort of rhetoric appeared in a report from the liberal Center for American Progress (CAP) in a plan that proposes substantial cuts in benefits.

To understand what CAP and other proponents of increasing the progressivity of Social Security mean, consider the idea of raising marginal tax rate paid by many middle-income people from 25 percent to 35 percent. The current 25 percent bracket begins at an income of $34,500 for singles, and $69,000 for couples.

Raising this tax rate by 10 percentage points would be a substantial hit to tens of millions of families who are certainly middle class by anyone’s definition. However, this tax increase would also be progressive. The bottom 60 percent of the income distribution would not be touched at all, and those just over the cutoffs would only see a small increase in their tax burden.

Nonetheless a couple earning $100,000 a year would see their taxes rise by $3,100, which is not a trivial matter for a middle-class couple. This is the way in the CAP plan for cutting Social Security benefits is progressive. It would lead to substantial reductions in Social Security benefits for people who earned an average of $60,000 or $70,000 during their working lifetimes. While such people earned more than most workers, such salaries don’t quite put them on a par with Bill Gates.

The reason why CAP wants to cut the benefits of factory workers and school teachers is because this is where you have to go if you want to have any substantial reductions in Social Security payments. Peter Peterson, the billionaire investment banker, is fond of telling audiences that he doesn’t need his Social Security check.  . . . Read the rest of this entry →

President Obama insists that he is a really bad negotiator, therefore the deal he got on the two-year extension of the Bush tax cuts and the one-year extension of UI benefits was the best that he could do. This package also came with a one-year cut in the Social Security tax.

This cut will seriously threaten the program’s finances if next year, the Republican Congress is no more willing to end a temporary tax cut than this year’s Democratic Congress.

The logic here is straightforward. Under the law, the Bush tax cuts were supposed to end in 2010. Tax rates returned to their pre-tax cut levels in 2011. However, the Republicans maintained a steady drumbeat about the evils of raising taxes in the middle of a downturn, even if the tax increase would just apply to the richest 2 percent of the population.

As we saw, President Obama and the Democratic Congress could not muster the votes needed to overcome the Republicans and ended up extending the tax cuts for the richest two percent of the population. The Democrats will be faced with a similar situation at the end of 2011 when the Social Security tax cut is scheduled to expire, except that this time the tax cut in question will apply to overwhelming majority of working people.

Also, the House will be controlled by the Republicans and the Senate will be considerably less Democratic. This raises the possibility, if not the likelihood, that the tax cut will remain in place indefinitely, more than doubling the size of Social Security’s projected long-term shortfall.

Before we even get to this juncture the Republicans will have another opportunity to impose a really bad deal on President Obama. Sometime in the spring the government will run up against its debt ceiling. This will prevent the government from any further borrowing.

Since the government has a substantial deficit, with spending exceeding revenue, hitting this limit would mean that the government would not have sufficient funds to pay for all its programs. It also would mean that the government could not pay interest or principal on debt that is coming due, in effect requiring it to default on its debt.

The prospect of the U.S. government defaulting on its debt creates the sort of end of the world scenario in which Congress rushed to pass the TARP in 2008. Back then, President Bush, Fed Chairman Ben Bernanke and all sorts of other luminaries told members of Congress and the public that we would have a second Great Depression if the Wall Street banks were not immediately bailed out, no questions asked. And the money flowed.

The prospect of defaulting on the debt will create a similar outbreak of shrill warnings of disaster. This would likely to lead to scenario in which President Obama signs whatever debt ceiling package House Republicans hand him, even if it includes the privatization of Social Security and Medicare and major cuts and/or elimination of other important programs. The argument from the administration will be that they have no choice.

In order to avoid this train wreck, supporters of Social Security and Medicare have to restructure the options. They have to push President Obama to announce in advance that he will never sign a debt ceiling bill that includes cuts to Social Security and Medicare, the country’s two most important social programs.

These programs are crucial to the financial security and health of tens of millions of people. If there are to be changes in these programs then they should occur after a full public debate in the light of day, not as the result of Republican trickery and parliamentary game playing.

This would be a hugely popular position since not only Democrats, but also independents and even Tea Party Republicans overwhelming support Social Security and Medicare. Furthermore, the gun, in the form of a potential debt default, is actually pointed at the Wall Street banks, not the public.

A debt default would be a very bad situation and one that we absolutely should try to avoid. But the day after the default, the country would still have the same capital stock and infrastructure, the same skilled labor force and the same technical knowledge as it did the day before the default. In other words, the ability of our economy to produce more than $15 trillion in goods and services each year will not have been affected.

One thing that would not be around the day after a default is Wall Street. The default would wipe out the value the assets of the Wall Street banks, sending Goldman Sachs, Citigroup and the rest into bankruptcy. The recovery for the economy from such a situation will be difficult, but the shareholders of the Wall Street banks would be wiped out and their top executives unemployed.

For this reason, the threat of a default is a gun pointed most directly at Wall Street. Given the power of Wall Street over Congress, is inconceivable that they would ever let the Republicans pull the trigger.

This means that if President Obama is prepared to take the right and popular position of supporting Social Security and Medicare, he will win. This is both good policy and great politics. The public just has to force President Obama to stand up and show some leadership.

I was originally willing to support the package that President Obama negotiated with the Republicans. While I am not happy about giving tax breaks to rich people, President Obama extracted more concessions from the Republicans than I had expected in the form of extending unemployment insurance benefits, an expanded earned income tax credit, and most importantly a substantial reduction in the payroll tax.

However, after further thought and conversations with people around Washington (first and foremost, Nancy Altman, the co-director of Social Security Works), I have become convinced that this deal would be a disaster. Paul Krugman does a nice job laying out the limited benefits of the stimulus, but my greater concern is what happens to Social Security in this story. Effectively, this deal would give us a permanent two-percentage point reduction in the payroll tax in a Washington climate very hostile to Social Security.

The logic is that the tax cut is scheduled to expire in December of next year. While it would require new legislation to extend the cuts, the Republicans will describe the failure to extend the cuts as a tax increase on middle class workers. (Several Republicans have already told reporters that this would be their view.)  . . . Read the rest of this entry →