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Does Obama Have it Right or Wrong on Social Security?
By Paul Solman
Staffers pick up their copies of the President's Fiscal Year 2014 Budget at the Senate Budget Committee in the Dirksen Senate Office Building on April 10, 2013. Photo By Douglas Graham/CQ Roll Call/Getty Images.
Today we present a range of reactions to President Obama's proposal to trim Social Security, as discussed on the NewsHour last night.
The President proposes to use a new measure of inflation called the "Chained Consumer Price Index" (Chained CPI). Right now Social Security uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to make cost of living adjustments. That measure doesn't take into account the fact that consumers can substitute one product for another when prices change. Chained CPI does. The result is that cost of living adjustments would be lower using a chained CPI measure of inflation which would reduce future benefits to Social Security recipients.
The description of the proposal on the White House website includes this:
We asked a panel of experts to weigh in.
"Ask Larry" Kotlikoff is our reigning Social Security answer man, whose Q&A column appears on Mondays.
Teresa Ghilarducci is a professor and author of "When I'm Sixty-Four: The Plot Against Pensions and a Plan to Save Them." Her last post concerned raising the retirement age for Social Security.
Jared Bernstein is a Senior Fellow at the Center on Budget and Policy Priorities. From 2009 to 2011, he was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama's economic team. He defended the President's plan on last night's program.
Phil Moeller writes the Best Life retirement blog for U.S. News & World Report.
Alice Rivlin was a member of President Obama's Commission on Fiscal Responsibility and Reform (The Simpson-Bowles Commission) and co-chaired, with former Senator Pete Domenici, the Bipartisan Policy Center's Task Force on Debt Reduction. She also served as Vice Chair of the Federal Reserve Board and was Director of the White House Office of Management and Budget in the first Clinton Administration.
Boston College economist Alicia Munnell is a retirement expert who has appeared on the NewsHour often over the years. She and I visited a community college some years ago to discuss raising the retirement age for Social Security and raising the pay ceiling on Social Security taxes.
According to table IVB6 of the Social Security Trustees Report, which, it appears, neither the President nor anyone else in Congress has examined, the system is 31 percent underfunded and needs a 22 percent immediate and permanent benefit cut to achieve fiscal sustainability. The President's proposal to gradually reduce benefits by adjusting the calculation of inflation does far too little far too late to get the system into long-term financial balance. Suggesting it will fix the problem and that all that the system needs is to be "tweaked" (this is precisely what the President said in the debates) is a grave disservice. What's needed is to freeze the existing system, pay off all accrued benefits over time, and implement my Purple Social Security Plan discussed at www.thepurplesocialsecurityplan.org.
Don't cut Social Security benefits with a chained CPI, instead increase benefits with a more accurate inflation index for elderly households, Current Price Index for the Elderly (CPI-E). If you believe that elderly Social Security recipients can easily substitute goods and services with cheaper goods and services of the same quality, raise your hand. I don't see many hands when I ask a group of people this, especially if they are gerontology experts and economists.
Seniors have to pay co-pays on medical services and drugs and can't find cheaper ones with ease. Old people don't have as much flexibility to shop at different stores or buy in bulk to avoid high prices. But the false belief that the elderly can easily find cheaper substitutes for the things they buy, backs president Obama's policy recommendation to substitute the chained CPI for the traditional measure of inflation called the Consumer Price index - the CPI.
Advocates for the chained CPI say it accurately reflects the real cost of living by taking into account the possibility that people can easily substitute chicken for beef as beef prices rise. That works in theory, but not in fact. Studies of the real lives of seniors show the opposite. The goods and services that seniors buy more than others, namely medical care, rise in price more. That means increases in Social Security benefits have not kept pace with increases in the prices of those goods and services purchased by the elderly, and that some other index might be more appropriate. Social Security should be chained to the CPI-E, which measures the changes in buying prices of a typical bundle of goods and services older people buy.
The differences between the chained CPI -- the President's proposed inflation index -- and the traditional CPI are small, just about .03% lower per year. But these small cuts year after year really add up--the average retiree would lose $1,147 a year by age 85 even though they lose just over $600 when they are 65. The cumulative cuts to people on Social Security reach $28,000 by the time a retiree is 95 according to advocates.
In contrast, linking Social Security inflation protection increases, cost of living adjustments (COLAs), to an elderly-targeted index (a more accurate CPI according to a Congressional Research Service report) would raise benefits by 6% for a 95-year-old rather than cut them by tens of thousands of dollars.
First off, I wouldn't call what's in the President's budget anything like a Social Security plan. The only proposed change to Social Security is the switch to the chained CPI. As I argued on the NewsHour last night, most economists, myself included, judge that to be a more accurate measure of inflation for the general population, but not for the elderly, since they spend more out-of-pocket on health care relative to everyone else. And it's implicitly clear that the administration agrees with that assessment, because they also propose a "benefit enhancement" to older Social Security recipients, a 5%-of-the-average-benefit bump-up, equivalent to $750 dollars today, phasing in at age 76. Interestingly, for low-income elderly, this would actually lead to an increase in their benefits relative to current law.
Look, we're making this way too complicated. The President didn't propose a plan to shore up Social Security's finances. That would be better accomplished by a bipartisan commission than crammed into a budget that is, I fear, unlikely to go very far given its call for higher taxes (which we do, in fact, need but which Republicans are unlikely to yield on). He put the chained-CPI in there as a concession to get Republicans to come to the table (it does, however, raise $230 billion over 10 years in deficit savings, not from Social Security but from its application to other parts of the budget and the tax brackets). It's a play for that "grand bargain" you hear a lot about: D's give on entitlements and R's give on taxes. I could be wrong, but I don't think the politics are there for that yet, but that's the context for understanding the one change to Social Security in the budget.
President Obama has offered up the wrong sacrificial lamb in proposing to replace Social Security's cost of living index with the so-called chained CPI. It has some virtue as a good measure of how consumers react to inflation with real-world spending changes. But both the present index and the chained CPI provide far too little weight to seniors' medical spending and thus sharply understate the impact of price changes on retiree pocketbooks. There is another price index that more accurately measures elderly spending patterns that could be the basis for a new Social Security Cost-of-Living Adjustment (COLA) - CPI-E.
Perhaps worse than the proposal itself is that is has been introduced as a stand-alone offer. Social Security changes simply must be addressed as a separate and complete reform package. Restoration of the program's long-term financial soundness is not hugely challenging in relation to the scale of Medicare and Medicaid deficits. But it ought to include a sensitive and politically challenging mix of payroll tax increases, means-testing of benefits, strengthened support for lower-income beneficiaries, long-overdue changes to help women and longevity-related adjustments that brings us into the real world of longer life spans, careers and retirements. Adopting the chained CPI as the new COLA would do none of these things.
I favor using a chained inflation index for federal programs--including indexed tax brackets, which would generate a bit more revenue--although I would prefer to see the change accompanied by other Social Security reforms to make this vital program secure for future retirees. A "chained" cost of living index takes account of the fact that people adjust their purchases as prices change. When beef prices shoot up, they buy less beef and more chicken. Hence, a chained index is a more accurate measure of inflation than one that assumes people keep buying the same items no matter what happens to relative prices. However, because the chained index rises a bit slower (maybe .3 percent a year slower) than the index we are currently using, the shift can be regarded as a benefit cut--one that would adversely affect the poor and the very old, who are already struggling. To compensate these vulnerable groups, the Domenici Rivlin budget proposal increased the benefits for low-income beneficiaries so they would actually be better off after the change and bumped up benefits at age 85 to help the very elderly. The President's budget does this, too, but does not take other needed steps to ensure the solvency of Social Security.
The budget is by nature a political document, not a serious plan. Any serious plan to fix Social Security would recognize first and foremost the need for additional revenues. The Social Security replacement rate - benefits as a percent of pre-retirement earnings - is declining for the average age-65 worker from 42 percent to 36 percent as the full retirement age moves from 65 to 67. Moreover, in the 2030s, when the Trust Fund is exhausted, the program will be able to pay only three-quarters of that amount, or 27 percent of pre-retirement earnings - a level not seen since the 1950s. The program needs more money.
Therefore, to start a dialogue on Social Security with a single proposal to cut benefits by shifting to a chained CPI is not helpful. It may send a political signal to Republicans of a willingness to deal, but it only makes the task of eliminating the Social Security deficit more difficult by tainting a proposal that could otherwise be part of a larger package.
In terms of the proposal itself, the administration should be clear that the shift to a chained CPI is a cut, not simply a "technical adjustment." It is a cut because the CPI currently used to index benefits understates inflation experienced by the elderly who spend more than the rest of the population on health care.
It is time to fix Social Security - the backbone of the nation's retirement system. A serious proposal, which relies more on revenues than spending cuts, would be much appreciated.
There is no "correct" price series for calculating cost-of-living increases for Social Security recipients. Certainly it isn't the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), the series that is currently used. I don't know any economists who use CPI-W to correct for inflation. Here is how it is described by the Bureau of Labor Statistics:
That isn't exactly a scientific endorsement on behalf of the CPI-W. But it was left in place as the cost-of-living measure for the elderly because the more general indices such as the CPI-U and the CPI Research Series Using Current Methods (CPI-U-RS) would have meant lower cost-of-living increases. Keeping CPI-W allowed the politicians to give more money to seniors without having to explicitly raise Social Security benefits.
Now politicians want to lower the amount they give seniors. They're looking for a way to do so without explicitly lowering benefits. Changing to chained CPI does that. It may be a more accurate measure of the cost-of-living changes facing the elderly but that's irrelevant. It's all politics.
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