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January 2013, Week 3

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Wed, 16 Jan 2013 15:55:35 -0500
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The 3 Percent Cut to Social Security, Aka the
Chained CPI

By Dean Baker
Huffington Post
January 14, 2013

http://www.huffingtonpost.com/dean-baker/the-3-percent-cut-to-soci_b_2475569.html

According to inside Washington gossip, Congress
and the President are going to do exactly what
voters elected them to do; they are going to cut
Social Security by 3 percent. You don't remember
anyone running on that platform? Yeah, well, they
probably forgot to mention it.

Of course some people may have heard Vice
President Joe Biden when he told an audience in
Virginia that there would be no cuts to Social
Security if President Obama got re-elected. Biden
said:

    "I guarantee you, flat guarantee you, there will be
    no changes in Social Security. I flat guarantee
    you."

But that's the way things work in Washington. You
can't expect the politicians who run for office to
share their policy agenda with voters. After all, we
might not like it. That's why they say things like
they will fight for the middle class and make the rich
pay their fair share. These ideas have lots of appeal
among voters. Cutting Social Security doesn't.

Help us speak truth to power. Donate what you can
afford to support NationofChange. While the politics
of cutting Social Security are bad, it also doesn't
make much sense as policy. In Washington, the
gang who couldn't see an $8 trillion housing bubble
until its collapse sank the economy has now
decided that deficit reduction has to be the
preeminent goal.

They don't care that we are still down more than 9
million jobs from our growth trend; deficit reduction
must take priority. These whiz kids apparently also
don't care that the cuts that have already been made
are slowing growth and costing us jobs.

If we actually did have to reduce the deficit it's hard
to see why Social Security would be at the top of the
list. After all, the vast majority of seniors are not
doing especially well right now. Our defined benefit
pension system is disappearing and 401(k)s have
not come close to filling the gap. Retirees and near
retirees have lost much of the wealth they had
managed to accumulate when the collapse of the
housing bubble destroyed much of their home
equity.

From a policy standpoint it would make far more
sense to tax Wall Street speculation. Congress' Joint
Tax Committee estimated that a 0.03 percent tax on
each trade could raise almost $40 billion a year.
Such a tax would also make the financial sector
more efficient by eliminating a huge volume of
wasteful trading.

It also is bizarre that Social Security would even be
considered in the context of the deficit. In law and
in practice it is a separate program, financed by its
own designated stream of revenue. Cutting benefits
as part of a deficit deal means that we will be
making cuts to Social Security with zero quid pro
quo in the form of increased revenue. That hardly
makes sense if the point is to protect the program.

What's more the cut in fashion in Washington is
especially poorly targeted. The idea is to reduce the
annual cost-of-living adjustment by 0.3 percentage
points annually by using a different inflation index.
That translates into a cut in benefits of 3 percent for
those who have been retired 10 years, 6 percent
after 20 years, and 9 percent after 30 years. The
people who have been retired the longest and
therefore the poorest will see the largest cuts.

And remember those pledges not to cut benefits for
those currently retired? Oh right, no one meant that
to be taken seriously.

The benefit cutters argument is another nice piece of
D.C. humor. The argument is that the current index
overstates inflation. However, there is an
experimental index produced by the Bureau of Labor
Statistics that shows the current index actually
understates inflation for seniors.

That is just an experimental index but if the
concern really is accuracy then the obvious answer
would be to construct a full index to examine the
cost of living of the elderly. But that suggestion just
draws contempt from the Social Security cutters.

In order to avoid feeling too badly about their plan
to cut Social Security, many of the cutters want to
protect some programs for low-income people. For
example, Supplemental Security Income (SSI) a
program for the disabled and low-income seniors
will be protected. The word is that SSI will continue
to be indexed to the current inflation index.

If we believe the claim that the chained CPI is the
more accurate measure of inflation, this is a
proposal to increase SSI benefits each year by an
amount that is 0.3 percentage points more than
annual rate of inflation. That may make sense to
inside Washington types, but anywhere else this is
loon tune stuff. If SSI benefits are too low (they are),
then raise them. What possible logic can there be to
have benefits rise each year by a bit more than the
actual rate of inflation?

The bottom line is that President Obama and many
leading Democrats are prepared to give seniors a
larger hit to their income than they gave to the over
$250,000 crowd. And the whole reason it is
necessary is that the Wall Street types who wrecked
the economy say so. Is everybody happy?

___________________________________________

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