The Grand Bargain is coming

The signs are everywhere, and it doesn’t much matter which party wins, now that Nancy Pelosi’s drinking the Kool-Aid: They’re going after Social Security and Medicare in the lame duck session. They’ll do it with what sound like “reasonable” adjustments like chaining payments to the Consumer Price Index, claiming it more accurately reflects the cost of living. (It doesn’t. For one thing, it doesn’t include the cost of heat. Grandma ice pops!) Economist Dean Baker says of course it’s not supposed to be more accurate, and calls the proposed switch a very big deal:

First of all, when all the inside Washington types agree on something, it is a good idea to hang on to your pocket books. Remember, these are the folks who thought it was great that everyone was becoming a homeowner in the middle of a housing bubble and that Alan Greenspan was the greatest central banker of all-time. In other words, inside Washington types are a group of people that mindlessly repeat the conventional wisdom and are largely incapable of original thought.

At the most simple level, the switch to a chained CPI is a way to reduce the annual COLA in Social Security by roughly 0.3 percentage points. That may sound trivial, but it is important to remember that this sum adds up over time. After ten years, this lower annual cost-of-living adjustment would imply a reduction in benefits of roughly 3 percent, after 20 years the reduction would be 6 percent, and after 30 years close to 9 percent. So this is real money.

This plan to lower the COLA raises two obvious questions. First would the new measure actually be more accurate, and second is a cut in Social Security benefits good policy?

There are some complex philosophical issues raised by a cost-of-living index but at the most basic level, the question is to what extent Social Security beneficiaries substitute between items to offset price increases. The proponents of switching to a chained index for the COLA are arguing based on research that examines the consumption patterns of the population as a whole.

The Bureau of Labor Statistics (BLS) has done research indicating that the Social Security population has qualitatively different consumption patterns than the rest of the population. This research suggests that a consumer pirce index based on the consumption patterns of the elderly would show a higher rate of inflation.

The BLS research would imply that someone who is concerned about the accuracy of the Social Security COLA might want a higher annual cost-of-living adjustment, not a lower one. Of course the BLS research is not conclusive, since BLS did not directly monitor the actual purchasing patterns of the elderly, examining the specific items they buy and the outlets where they shop.

However, BLS could do this and construct a full elderly CPI. This would cost in the neighborhood of $10-20 million. While that may seem expensive, this index is being used to determine a COLA for $700 billion in annual spending. If the full elderly index turned out to show the same rate of inflation as the overall CPI, then there would be no need to continue to do it. However, if the rates differ, then we would continue to maintain the elderly CPI, if the interest is accuracy.

This is a simple way to distinguish between people who want an accurate COLA and people who just want to cut benefits. Those who want an accurate COLA advocate having BLS construct a full elderly CPI. People who just want to switch the indexation to a chained CPI simply want to cut benefits.

This brings up the second question as to whether a cut in Social Security benefits is a good idea. The Washington insiders like to treat this proposed cut in benefits as a small matter — it’s just 0.3 percent a year. But this adds up. If a typical beneficiary receives benefits for 20 years then the average cut in benefits is roughly 3 percent.

Is that a big deal? For almost 40 percent of beneficiaries Social Security benefits are more than 90 percent of their income. For these people, a 3 percent cut in benefits is roughly the same as a 3 percent cut in income.

If we want to know whether that is a big deal we need only turn to the Republicans who are screaming about President Obama’s plan to end the Bush tax cuts. For high end earners this would raise the top marginal tax rate by 4.6 percentage points. Since most high-end earners will have most of their income taxed at lower rates, the switch to a chained CPI would probably have more impact on the income of most Social Security beneficiaries than the ending of the Bush tax cuts would have on the income of most high-end earners.

This means that if we think the Bush tax cuts are a big deal to high-end earners then the chained CPI is certainly a big deal to most seniors. It is not something to be done in the middle of the night by Washington insiders who think they know more than the rest of us.

It is important to remember in this story that most seniors are approaching retirement with very little other than their Social Security. This is the fault of the Washington insiders who were not able to see the $8 trillion housing bubble, the collapse of which wrecked the economy. It also destroyed most of the savings of most older workers, which was the equity that they had in their homes.

In short, there is an argument that a chained CPI could provide a more accurate basis for the Social Security COLA. Anyone who really believes this argument would support having the BLS do the research that would determine whether or not it is true.

Alternatively, there are those who see the CPI as a way to cut Social Security and would like beneficiaries to believe that it is not a big deal. Whether or not something should be viewed as important is subjective. However for most beneficiaries, switching to a chained CPI would have a larger impact on their retirement income than ending the Bush tax cuts would have on the income of most high income households.

The latter has certainly been viewed as a very big deal in American politics. To be consistent, we must also view the switch to the chained CPI as a very big deal.

5 thoughts on “The Grand Bargain is coming

  1. Nothing much will happen in the lame duck session whether or not Pelosi drinks Kool-Aid. Ask any senior if they would accept a change in the COLA formula as long as they were guaranteed a cost of living increase every year, to not receiving any increase for more than two years to satisfy an austerity driven Congress and the answer would be a resounding “Yes.” There are two things in life that no politician should ever do. 1. Spit or piss into the wind. 2. Screw with old people’s Social Security money.

  2. Let’s see if we make it to the elections first. i wouldn’t rule out widespread mayhem this summer with all those kids and young adults with nothing to do, no income, nothing to lose. Everyone’s tense and on edge, every day another insane situation, further proof that the human species is devolving, continued pollution of all kinds (radiation to Roundup), the financial world in complete disarray and Mother Nature pissed off.

    “Interesting” times, indeed.

  3. Uh, I’m a senior on Medicare and SocSec and I wouldn’t accept putting future retirees’ economic well-being at risk this way.

    And who the hell is going to vote for Democrats if they let this happen?

    We need to tell DC Dems that if this is the way they’re going, we’re not going to never support this lame, half-witted party again.

    And tell local Dems the same thing.

    ASAP. Over and over. NOW.

    And we can’t wait until after the elections — they need to get our message NOW before they’re elected. They need to make absolute promises to us the voters before we give any of them our votes.

  4. I’m with jawbone. I have a bridge in Brooklyn to sell to anyone who thinks you elect politicians first and then bargain with them.

    If the Democrats are going to do everything the Republicans have been wanting to do for years, only faster, why exactly do we have to vote for them so that the lunatics won’t win?

  5. I think the only viable option is to contact every Democratic representative you have, and tell them you will never vote for a Democrat again – INCLUDING THE LOCAL LEVEL – if they cut our earned benefit programs.

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