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A Social Security Miscellany

Most of the Republicans running for the presidency want to cut Social Security.  In fact, it is easier to list the ones that say they do not want to cut Social Security:  Mike Huckabee and Donald Trump.

As far as the Democratic candidates go, things look pretty good.  Bernie Sanders and Martin O’Malley want to increase the Social Security benefit. Hillary Clinton was pretty noncommittal about Social Security in 2008, which was worrisome, but I think we can put her down as saying she is opposed to cutting Social Security today.

This is especially good news considering how grim things have been during Obama’s presidency. He started off with the Cat Food Commission, and then threatened us with a Grand Bargain, followed by attempts at sequester giveaways.  It was called “showing leadership.”  After promising in no uncertain terms that he would not reduce the COLA for Social Security by using the chained CPI the way John McCain wanted to do during his 2008 campaign for president, Obama soon started offering to use chained CPI in his negotiations with the Republicans, and even unilaterally included it in his budget in 2013.  And this was after Joe Biden promised unequivocally in 2012 that there would be no cuts to Social Security during a second Obama administration.  Yet we heard not a peep from Biden when Obama started pushing the chained CPI right after being reelected.  Technically, Biden’s promise was kept, but that was in spite of the efforts of the Obama administration, not because of them.  Even Nancy Pelosi was arguing that using the chained CPI would not be a cut, but only a more realistic measure of inflation that would strengthen the program.

But that seems to be in the past.  Now it is only the Republicans we have to worry about. Collectively, they propose four different ways to cut benefits: raise the retirement age, reduce the cost-of-living adjustment, means test the program, and privatize it.  All the different ways of cutting Social Security are bad, but the chained CPI is the most insidious.  It can be characterized as just a statistical adjustment to bring the COLA in line with actual inflation, which is why so many Democrats have been in favor of it, thinking they could sleaze it right past us.

To see what effect the chained CPI would have in the future, we might consider what effect it would have had in the past.  In 1975, the government started automatically making cost-of-living adjustments to the Social Security benefit based on the CPI-W, which tracks the CPI so closely that we need not worry about the difference.  The average Social Security check today is $1,332. During the 40 years since 1975, annualized inflation has been 3.8%. So, adjusted for inflation, the equivalent Social Security check in 1975 would have been about $300. The difference between the chained CPI and the CPI-W varies, but it averages around 28 basis points (or 0.28 of a percentage point). Therefore, had the chained CPI been in effect since 1975, the average COLA would have been 3.52%.  That hypothetical $300 check in 1975 would have been increased to $1,197 today.  So, those who say that the chained CPI is a more accurate measure of inflation must be deeply chagrined at the way the average Social Security beneficiary is ripping off the government by receiving an undeserved extra amount of $135 every month.

Needless to say, there are those who argue that not only does the CPI (or CPI-W) not overstate inflation, but it actually understates it, especially for people on Social Security.  Martin O’Malley has proposed using the CPI-E, because it more closely tracks the cost of living for the elderly. The difference between this and the CPI-W also varies, but the CPI-E tends to be more than the CPI-W by about 10 basis points (or 0.10 of a percentage point).

To settle this issue, I hereby introduce into this statistical analysis an anecdote, a much maligned form of evidence.  As anecdotes go, however, I think this one is pretty good.  In 1975, I was living in a large one-bedroom apartment near downtown Houston.  In 1981, I moved to a very similar kind of apartment in the same area, and I have lived there ever since.  I use the cost to live in such an apartment as my personal measure of inflation because rent (including utilities) is a large part of my budget, is easy to keep track of, is a necessity rather than a luxury, and is of consistent quality (my apartment is older than it used to be, so the quality is a little less, but I won’t quibble).  In 1975, my rent was $175 per month.  Today, my rent is $1,030.  This means that the annualized rate of increase in my rent over the last 40 years has been 4.53%.  In short, according to my anecdotal measure of inflation, the CPI understates inflation by 73 basis points (or 0.73 of a percentage point).

Honorable mention in this debate must go to Ted Cruz, who wants to use the CPI – 1 to determine the COLA for Social Security, because he says that the CPI overstates inflation by 1 percentage point.  Therefore, instead of an annualized COLA of 3.8% over the last 40 years, it should have been 2.8%. The hypothetical check in 1975 of $300 would today be $905 instead of that $1,332 check that those greedy geezers cash every month.

The Republican frontrunner is Donald Trump, who, as noted above, is opposed to cutting Social Security, so that is two points in his favor (but subtract a point because he wants to partially privatize it).  But I doubt that he will win the nomination, and if he does, I doubt that he will win the election. So, Mike Huckabee aside, if one of the other fifteen Republicans wins the nomination and then the election, his coattails will probably increase the Republican presence in Congress by enough to facilitate cuts to Social Security by various means, including the chained CPI.

Republicans have always hated Social Security and wanted to kill it or at least cut it, going all the way back to 1935.  What is remarkable today is how many of the candidates are being so forthright in their eagerness to make these cuts. One would think that the self-interest of the voters would preclude that sort of thing.  Unfortunately, short-term self-interest and long-term self-interest are two very different things, and that is what the Republicans are counting on.

The Social Security Trust Fund is projected to run out of money in about twenty years.  The only alternative to a benefit cut to bring the program into balance is a tax increase. “What would you rather have,” the Republicans are asking the voter, “a benefit cut in the future or a tax increase right now?”  Sad to say, there are a lot of people for whom the prospect of living in poverty when they are old just does not instill the same horror as having a little more taken out of their paycheck today.  It is for this reason that not even the Democrats running for president have suggested increasing the payroll tax. Instead, Sanders and O’Malley have advocated increasing the cap on the payroll tax, and Hillary, with her usual caution, says she is receptive to the idea. The Republicans will characterize this proposal as typical class warfare, another soak-the-rich scheme of the Democrats.

While Republicans shrewdly exploit the short-term self-interest of the electorate, which gives too much weight to the present over the future, these same Republicans conveniently assume the very opposite in justifying the cuts they want to make.  They assure seniors that the cuts will not affect them, but only those below, say, the age of fifty.  (Of course, that would not be true if the chained CPI were to be used for the COLA, but we’ll let that slide for the moment.) The idea is that by proposing changes that affect only people who are younger, Republicans would be giving those young people plenty of time to make adjustments.  In other words, those younger voters, the very people who would let loose with a FICA scream if they saw a few more dollars being taken out of their paycheck owing to an increase in the payroll tax, will prudently set those same dollars aside and invest them wisely once they are informed of future benefit cuts.

Few people openly embrace the idea of paternalism.  It suggests that some people, though they are adults, yet they must be treated like children who do not know what is best for them, while others must take the role of their parents and make decisions for them.  Republicans especially like to vilify big government in this light, saying that it is presumptuous for the government to think it knows better than you do what is good for you. Admittedly, paternalism does not make a good fit with the ideals of democracy, liberty, and equality.

But the fact remains that there is a need for paternalism, for many people are indeed like children.  No matter how much money they make, they will spend it all, living paycheck to paycheck.  And then, not satisfied to spend today with no thought of the future, they will even borrow from that future so they can spend even more today.  If they have an IRA or a 401k plan, long before they reach the age at which they should be able to retire, they will have borrowed against it or emptied it our entirely.  Even those who are more responsible and prudent will find themselves beset with the imperatives of the present.  The more money one has, the more others seem to need it.  Those who cannot be tempted by frivolous expenditure may find themselves emptying out their bank account for the sake of someone they love.

That is the beauty of Social Security.  Money is taken away from people before they have a chance to spend it.  No matter how foolish they are, they cannot squander it, and they cannot be sued for it.  No matter how great the need is of some loved one, they cannot borrow against it.  But the need for Social Security, its ability to protect people from their own worst instincts, may be undone by those very instincts if they lead voters to put a Republican in the White House who will immediately move to cut Social Security, and then use the savings for another tax cut.

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