Social Security, Inflation, and Punishing the Poor

December 19, 2012, 4:45 p.m.

"Have you no sense of decency, sir, at long last? Have you left no sense of decency?"

-- Attorney Joseph Welch, to Senator Joseph McCarthy, June 9, 1954

It is appalling that President Obama is offering to cut Social Security payments to our nation's most vulnerable, elderly poor. Jonathan Weisman, "Obama's New Offer on Fiscal Crisis Could Lead to Deal," New York Times, December 18, 2012, p. A1 ("The White House says the president’s plan would cut spending by $1.22 trillion over 10 years . . .. Of that, . . . $122 billion comes from adopting a new measure of inflation that slows the growth of government benefits, especially Social Security."); for more details see Annie Lowrey, "Social Security Checks Enter the Debate," Debt Reckoning/ New York Times, December 18, 2012. [Photo credit: multiple sources.]

With Elizabeth Barrett Browning, "Let me count the ways," the reasons why this is an appalling development.

1. There was, if not a promise, at least a country-wide understanding that, however else the President and Congress might screw over the American people with their "fiscal cliff" compromises serving their own and their campaign contributors' interests, Social Security was "off the table."

2. Not only was this the understanding, there is good reason why it should be. Social Security has nothing to do with our $16 trillion debt, our $3.8 trillion budget, our $900 billion deficit -- or our roughly $500 billion annual balance of trade deficit. Social Security was created to be, and is, a stand-alone program with its own revenue stream (the payroll, or F.I.C.A., tax) and it's own payments.

3. Even if Social Security had been on the table, this is the worst possible time to address what tweaking it may require. Some of the reasons were addressed earlier in "Rappelling Down the Fiscal Bluff; Clearly the 'Least-Worst' Win-Win Solution," December 16, 2012. (a) The odds of a good deal for the American people -- or even partisan, ideological Democrat and Republican Senators and House members -- coming out of the current negotiations are somewhere between very slim and none at all. (b) If you divide the decade-long projections by 10 years, the billion-dollar amounts the negotiators are talking about are almost insignificant when compared with our multi-trillion-dollar challenges. (c) The President wants to raise taxes on the wealthy for symbolic and political reasons; namely, he campaigned on that proposal. OK, but he's already accepted a redefinition of "wealthy" from $200 million a year to $400 million a year. It looks like even that was obtained in exchange for corporate tax benefits that the middle class will end up having to pay for (see the White House guest list in "Rappelling Down the Fiscal Bluff," linked above). (d) In no event is what's he's gained worth the pain he will cause to America's most vulnerable.

4. And even if one is untroubled by all the reasons why dealing with these issues now is likely to produce less than optimum substantive results, why on earth would anyone want to preempt the newly elected members of the House and Senate?

I once asked Senator Hubert Humphrey what he told the newly elected senators. He said, "I tell 'em they need to give four years to the Lord, and then two years to get re-elected; four more years for the Lord, and then two more years to get re-elected." It's unlikely that any of today's Washington politicians are going to be giving four years to the Lord -- or to anyone else, other than their major campaign contributors. But they might be willing to give us at least one year. They do seem to be, Republicans and Democrats alike, at least slightly, marginally, more reasonable and rational than the last bunch. And even some of the Republicans who are returning seem to be grasping the idea that a political party cannot dismiss immigrants, minorities, youth, union members, women and the elderly and still win elections.

In any event, it seems really inappropriate to rush legislation as important as this through a lame duck Congress at the eleventh hour.

5. Even if Social Security was on the table, and should be -- neither of which are true -- and even if there was an urgent need to fix it now -- which there is not -- there are better, more equitable, ways to create the added revenue we may need for Social Security many years on down the road.

(a) There is currently an upper limit on the amount of an individual's income that is subject to the payroll tax: $106,100. Since our leaders have now decided one needs to earn at least $200,000 to $400,000 a year before the rest of us can call them "wealthy," why not raise that $106,000 cap accordingly?

(b) Those who are receiving the supplemental income of a Social Security check and continue to work (for pay), or who have investment or other income, could pay a supplemental tax on that supplemental income. Social Security was never designed as a dollar-for-dollar savings plan; you might get more than you paid in, or less. It was designed to alleviate the ravages of poverty for the elderly retired. Everyone who has paid in should get something back, regardless of wealth and income. But those who are not among the group for which the program was designed could certainly afford to pay a supplemental tax on their Social Security income above and beyond what they would pay on it if they were not so well off.

(c) Americans are living, and working, beyond what was the case in 1935, when Social Security was enacted. There is already a choice, flexibility, and formula, regarding the level of Social Security benefit payments and the age at which one retires, or otherwise applies for Social Security. These provisions could be tweaked to increase the cash flow into, and retention of funds by, Social Security. By raising either the ages for each percentage payment, or lowering the percentage payments during the earlier years -- providing an incentive to postpone the age at which one draws Social Security -- there would be an increase of funds into the program, and a decrease in payments out.

(d) None of these possibilities, and the others that may exist, are a reason for addressing Social Security solvency at this time -- for the reasons mentioned above. It is only to say that, if one insists on using this, the worst possible time, to do so, there is no reason to start off with the most cruel and mean-spirited of the possible options: reducing the real income of the most vulnerable.

6. The savings involved are (a) not relevant to the problem at hand (see "2," above), (b) thus, even if they could be counted (which they shouldn't be), at $12 billion a year they are trivial as a solution to our multi-trillion-dollar challenge, and yet (c) of enormous significance to recipients, as we are about to see.

Let's start with these numbers from the Social Security Administration Web page, and then move on to the significance of "inflation."

The Social Security Administration reports that the average monthly payment to retired workers is $1234. That's $14,808 a year. And that, "Among elderly Social Security beneficiaries, 23% of married couples and about 46% of unmarried persons rely on Social Security for 90% or more of their income." "Social Security Basic Facts," Social Security Administration, July 30, 2012.

How many folks are there in your family, or among your circle of friends, who are living on $15,000 a year? How many have you ever met or talked to? And don't forget, if $14,808 is the average, whether mean or median, that means that half are living on less than that.

7. Inflation is the cruelest thief.

In October 1987 the stock market went down 20%. When Sam Walton was told his shares of Wal-Mart stock had declined by $3 billion, he calmly responded, "It's paper. It was paper when we started, and it's paper afterward."

Dollars are also paper -- printed by the government; they are of no more intrinsic value than Sam Walton's stock certificates. Both have value only in terms of how much they can be exchanged for -- food, apartment rental, gas for the car, personal services.

And what they can be exchanged for is a function of time. A dollar is not a dollar. A dollar only has a value at a particular time. A dollar in 1942 is different from a dollar in 1982 or 2012.

For example, the Bureau of Labor Statistics "Consumer Price Index Inflation Calculator" indicates that to buy what $10,000 would have bought when Social Security was enacted (1935) would require today -- can you guess? -- $168,044.53. Let us say each would have bought you a comparable house -- in terms of square feet of living space -- a $10,000 one in 1935 and the $168,000 one in 2012; roughly the same house, for "the same" price (in terms of the value of those dollars when it comes to real estate.

The 2012 price is almost 17 times the 1935 price. That may make accounting, and price comparisons over time a little difficult. But so long as your income is now also 17 times what it would have been in 1935, you can maintain your standard of living.

But if you're living on a $14,808 a year Social Security payment in 2012, and there's 10 percent inflation by 2015, and you don't get an additional 10 percent in Social Security ($1481), or $16,289, you may still have $14,808, in 2015, but you don't have the equivalent of $14,808 in 2012 in terms of value.

That's why messing with the inflation formula for Social Security is so significant -- even if it were relevant to the fiscal cliff, which it is not.

8. Of course, there's no single way to calculate inflation. Prices when? Where? For what? For whom? How often, and how much of it? If you always travel by bus or train, an increase (or decrease) in the price of gas doesn't affect your standard of living as much as if you always drove a car. Same for the price of homes. The price of cigarettes for someone who doesn't smoke. Or anything else that others buy, but you don't.

For example, my rule of thumb -- based on late 1930s and early 1940s prices for candy bars and ice cream cones (which I consumed; 5 cents); cigarettes (20 cents a pack) and coffee (5 cents a cup) (which I did not); sugar, flour, cabbage (10 cents a pound); and automobiles (standard Fords and Chevrolets were then $500-700) -- is that most things have increased by at least 20 to 30 times since then.

So it makes a big difference in calculating inflation just which items you put in that shopping cart, and which you don't. It's not inappropriate to try to fashion an inflation index that is as representative as possible of the actual experience and expenses of the elderly poor.

But I don't think that's what's going on here. This seems to me to be wholly focused on what can (inappropriately) be characterized as "savings" in budgeted expenses -- not how to best fashion an inflation index that will most fairly preserve the value of what seniors receive in Social Security payments.

In fact, if the discussions really were focused on making appropriate adjustments in the inflation index for the elderly, the inflation rate would increase, not decrease:

Some economists and policy experts have also argued that both the current and the chained indexes underestimate the inflation that older Americans experience. The government produces an experimental “elderly index” . . . that tries to capture the consumption habits of people over 62 more accurately than other measures. For instance, older people buy more health care and less education than the average family, so the elderly index puts more weight on the former and less on the latter.

In no small part because of spiraling health care costs, inflation as measured by the elderly index has grown faster than inflation as calculated by the standard index that Social Security uses.

Annie Lowrey, "Social Security Checks Enter the Debate," Debt Reckoning/ New York Times, December 18, 2012.

Not only are the analysis and discussions not focused on making the inflation index for the elderly poor more representative of their actual increases in cost of living, they have come up with something they call a "chained" CPI: which is even worse than what seniors have now.

Democrats and Republicans are considering switching Social Security payment adjustments to a “chained” Consumer Price Index. The Consumer Price Index tracks the price of a basket of commonly purchased household goods. A chained index accounts for consumers’ tendency to substitute similar items for one another as prices fluctuate. A consumer might buy more apples when the price of oranges increases, for instance.

Though it sounds like nothing more than a technical fix, adopting a chained index would squeeze benefits over time. The chained index ends up, in a given year, about 0.3 percentage points lower than the unchained index. That difference accumulates, so after five years, it might be 1.5 percentage points lower. Using a chained index would cut Social Security spending by about $112 billion over a decade, according to an estimate by the Congressional Budget Office.

Ibid.

How do you like them apples?

AFL-CEO President George Meany once told me that it all comes down to "who gets the pork chops and who gets the beans." I guess seniors don't need to eat meat so long as they can still afford beans. (I actually like rice and beans.) But how many corporate CEOs, university presidents, school superintendents, Senators and Members of Congress, or football coaches would buy this argument for their foregoing a raise? Send your kid to a cheaper college; rent that summer home for a couple weeks instead of buying it; drive that car another three years; wear blue jeans instead of $2000 suits; make more meals at home.

What's that line about "God loves the poor"? I sure hope so, because it's becoming increasingly obvious that our elected officials don't.

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