Greedy Geezer Logic

One of the issues that have surfaced in this presidential election cycle is that of the advantages or disadvantages of free trade versus protectionism.  And so it was that a friend of mine and I found ourselves debating the issue.  As an unabashed protectionist, who has been opposed to all these free trade deals starting with NAFTA, I said that I wanted tariffs that will encourage more goods to be manufactured here in the United States, in part because I think it is better if we are self-sufficient in this regard and in part because it will mean better paying manufacturing jobs for the American worker.  And if it be argued that much of that manufacturing would be done with robots, then let them be our robots.

My friend, on the other hand, believes in free trade.  He argues that higher tariffs will result in higher prices, so that any increase in wages will be offset by the increase in prices.  Furthermore, he points out, whereas the increased wages will be taxed, thereby reducing the dollar amount received by the worker, the increased prices will be subject to sales taxes, thereby increasing the amount paid out by that same worker.  Therefore, he concludes, the American worker will be worse off without free trade.

Each of us being unable to persuade the other, we soon moved on to other topics.  It was only later, however, that it occurred to me that as both of us are retired, we would both be better off with free trade.  That is to say, even if I were right and the American worker would make more money in wages than he would have to pay out for the stuff he buys, affording him a higher standard of living, I, my friend, and anyone else that is retired would be worse off.  No longer working, we would not benefit from the higher wages, but we would definitely suffer from the increased prices.

Now, I could tell you that notwithstanding this consideration I remain a protectionist owing to the fact that I am high-minded and care more about what is good for this country in general than my own narrow self-interest.  However, the truth of the matter is that my advocacy of protectionism was more the result of a lifetime of working for wages, creating a strong affinity between me and the American worker in general, but that from the moment this evil thought entered my head that without free trade I would have to pay higher prices without any offset from higher wages, the idea of protectionism has been losing its appeal.

What is true about goods is also true about services.  Lower labor costs mean that I will have to pay less for services provided to me.  At the same time, as someone who is retired, I do not suffer from being paid less for the services I might have had to provide were I still a part of that labor force.  And thus it is that while I, along with so many others, suffered from the decline in real income during the years that I was working, now that I am retired, such declines in real income on the part of the American worker will only be to my benefit.  In fact, if I were a cad, I would be hoping there will be even more such declines in real wages in the years to come.  But I am not a cad.  At least, not too much of one.

Inasmuch as the demographic trend is for an increasingly older population, self-interested calculations of retirees will tend to play an even greater role in the future.  That is to say, as the population ages, there will be more political pressure in favor of free trade over protectionism owing to the fact that retired people will receive all the advantages of lower prices without suffering the disadvantages of lower wages.  Add to this the fact that older people are more likely to vote than younger people, and the demographic effect will only be intensified.  Moreover, this reasoning concerning the asymmetrical considerations of prices and wages for those of us that are retired is not restricted to just the question of free trade and protectionism.  It also has implications elsewhere.

Consider the matter of illegal immigration.  One of the arguments for putting a stop to illegal immigration is that it takes jobs away from American workers and forces those Americans that keep their jobs to work for less as a result of having to compete with this cheap labor pool.  On the other hand, these illegal immigrants provide goods and services at a cost much less than would have to be paid if American workers had those jobs.  Once again, for the American worker, there is the symmetrical tradeoff of wages and prices, while for the retired American, there is the asymmetrical consideration of prices only.  As a result, as the number of retired people increases, there will tend to be increased political pressure favoring de facto open borders.  However, unlike the issue of free trade, prices and wages are not the only consideration when it comes to illegal immigration, so this is not a pure case.

We have not heard anything about replacing the income tax with a value added tax in this presidential election cycle, and if the above considerations are valid, we are not likely to hear much about it in the future.  While some retirees are well-off enough to have to pay income taxes, most do not.  As a result, retirees would look with disfavor on any plan that would eliminate a tax they no longer have to pay anyway and replace it with a tax resulting in higher prices on the things they still have to buy.

What we do hear about, however, from a candidate that might just become the Republican nominee if the Stop Trump movement is successful, to wit, Ted Cruz, is a tax plan that is equally unlikely to be regarded by retirees with much enthusiasm.  Without going into all the details of his plan which may be perused here, he wants to significantly cut income taxes.  But, as noted above, paying income taxes is not a major concern for most retirees.  On the other hand, Cruz also wants to reduce the COLA for Security by a percentage point because he believes the CPI overstates inflation by that much.  So, if the CPI says we had 3% inflation, the amount of one’s Social Security check would increase by only 2%.  Needless to say, a retiree with, say, a twenty-year life expectancy would regard such a change in the law with alarm.

Not only are Ted Cruz’s proposals likely to become ever more unpopular as the number of retirees increases (assuming he doesn’t get elected and push it through Congress in 2017), there is likely to be a shift to a very different kind of entitlement reform in the future.  While Republicans have been boldly talking about cutting Social Security in one way or another (reducing the COLA, means testing, raising the retirement age, privatizing), Democrats have been sneaking up on the idea of lifting the cap on the payroll tax as a way of putting Social Security in the black.  I predict that as the number of retirees increases, Republicans will begin to lose their nerve while Democrats will gradually become emboldened.  In short, the solution that logic has called for but politics has forbidden is that of not merely lifting the cap, but of raising the payroll tax itself.  The taboo of raising the payroll tax will diminish in the years to come inasmuch as it is a tax retirees will not have to pay.  They will get all the benefits of a secure Social Security check without any of the costs.

Given my argument that the self-interest of the increasingly large retirement population will mean more political pressure in favor of free trade, open borders, and higher taxes, some might say that I am playing right into the stereotype of the greedy geezer popularized by Alan Simpson.  Well, in the words of Gordon Gekko, “Greed is good.”

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.