Social Security and the Cliff: A Response

January 7, 2013, 9:20 a.m.

Note: Normally I don't respond to critics. Adlai Stevenson once advised me, when I was Maritime Administrator and advocating polices not well received by the shipping and ship building industries, "Don't pay any attention to your critics, Nick. Don't even ignore them." I've pretty much followed that advice over the years. To the best of my recollection, the only comments deleted from this blog over the past six years have been advertisements for goods or services that were otherwise unrelated to the content of the blog entry. Critical comments have been retained and are still available.

However, a recent column of mine in the Iowa City Press-Citizen regarding the fiscal cliff and proposed modifications in Social Security inflation formulas produced two published letters to the editor containing what I consider to be factual inaccuracies regarding both the Social Security program and what I wrote about it. Given the importance of this program, and the fact that it will continue to be a subject of national discussion over the next few months, and that these letters will remain forever in the hard copy editions of the paper retained by libraries, I felt that a letter to the editor from me, at least noting my disagreement with those letters, with links to what I have written, was required.

My letter is reproduced, below, as it appeared in this morning's hard copy and online newspaper. (It is also available, as of this morning, here on the Press-Citizen online site, from which it will probably be removed by the paper a week or so from today [Jan. 7].)

Lest there be question, let me expressly disavow any suggestion that I'm asserting everything I've written is true, and everything my critics say is wrong. I have authored one newspaper column and a couple of blog entries on this subject -- neither a doctoral dissertation nor a congressional committee report. All I'm contending is that these issues are of sufficient significance to every American that no one's assertions -- not mine, and not my letter writers' -- should stand unchallenged. Everyone needs to participate in this discussion, and to the maximum extent possible try to make an effort to first get the facts.

One of the two (so far) critical letters contains as well comments that are, at best, ad hominem in nature and at worst defamatory. They will not be responded to, both because they have nothing to do with the Social Security issues and in accord with Ambassador Stevenson's advice.

The earlier bog entries on the subject, in which are imbedded my original column, the two letters to the editor, and some of the online comments from readers, can be found here: "Social Security: The Press-Citizen Column," December 26, 2012; "Social Security, Inflation, and Punishing the Poor," December 19, 2012, and the related "Rappelling Down the Fiscal Bluff," December 16, 2013.

Let's Move Beyond 'Tis-'Tain't
Nicholas Johnson
Iowa City Press-Citizen, January 7, 2013
Regarding the letters, “Local Columnist Plain Wrong on Social Security” (Jan. 2), and “Johnson Refuses to Accept Reality” (Jan. 3), criticizing the column, “Proposed Social Security Changes Punish the Poor” (Dec. 26): “’Tis-’Tain’t” exchanges seldom produce agreement or even mutual understanding. Nor is there space in a letter to prolong the disagreements intelligently.

However, I would like the hard-copy Press-Citizen record to reveal my rejection of many of these letter writers’ assertions (as well as those in any future letters you run along the same lines). Links to the blog entries that have already addressed the matters raised in those letters -— blog entries that, over time, will be revised to contain these and other critics’ comments as well as the original column -— can be found at http://fromdc2iowa.blogspot.com.

Nicholas Johnson
Iowa City
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Social Security: The Press-Citizen Column

December 26, 2012, 10:55 a.m. [Note: See the related, "Rappelling Down the Fiscal Bluff," “Social Security, Inflation, and Punishing the Poor,” and the "Addendum," December 27, 2012, at the bottom of this blog entry (a seven-point reply to an incoming email, providing an explanation why Social Security, and its trust fund, are an independent, stand-alone program unrelated to the "fiscal cliff" issues involving federal income tax rates and the budgets for federal programs).]

See also the January 7 letter to the editor in the Press-Citizen responding to two prior letters criticizing this column, ""Social Security and the Cliff: A Response," January 7, 2013. The text of those two letters, along with some readers' comments, are reproduced below.]

Proposed Social Security Changes Punish the Poor
Nicholas Johnson
Iowa City Press-Citizen, December 26, 2012, p. A11

Going over the fiscal cliff is no fun, but it’s our least-worst solution. For many reasons. See “Rappelling Down the Fiscal Bluff.” [Photo credit: multiple sources.]

Modifying Social Security illustrates one reason why.

I asked Sen. Hubert Humphrey what he told new senators. He said, “I tell ’em they need to give four years to the Lord, and then two years to get re-elected.” Today, few Washington politicians will give four years to anyone other than campaign contributors. But the newly elected might give us one year. Why hand our problems over to the lame ducks on Christmas Eve?

Wasn’t Social Security “off the table”? It should be. It has nothing to do with our $16 trillion debt, $3.8 trillion budget, or $900 billion deficit. And President Obama is getting precious little for this capitulation to the mean-spirited among us. The only winners so far are the White House visitors negotiating more corporate tax breaks.

Even if Social Security was on the table, and should be — neither of which is true — and even if there was an urgent need to fix it now — which there is not — there are fairer ways than benefit cuts.

(1) Raise the $106,100 cap on payroll taxable income. (2) Raise the tax rate by half a percent. (3) Impose a supplemental income tax on Social Security payments to the wealthy. (4) Further tweak retirement age-related percentages of benefits. But remedies aren’t needed now.

Even if inflation-index Social Security savings counted (which they don’t), at $12 billion annually they would provide trivial benefit to reducing our multi-trillion-dollar challenge, while striking an enormous blow to the elderly poor.

The Social Security Administration reports average recipient payments are $14,808 annually (half get less). And, “about 46 percent of (elderly) unmarried persons rely on Social Security for 90 percent or more of their income.”

When Sam Walton’s Wal-Mart stock declined by $3 billion, he calmly observed, “It was paper when we started, and it’s paper afterward.”

Dollars have no more intrinsic value than Sam Walton’s stock. The $10,000 house when Social Security was enacted (1935) is $168,000 today. The five-cent cup of coffee is $2 — a 40-fold increase. That’s “inflation.” That’s why the elderly poor, who’ve contributed to Social Security, need more than a fixed number of dollars. They need enough inflation-adjusted dollars to buy what they could buy with the benefits they were initially provided.

The inflation index matters.

The conventional consumer price index (CPI) prices a basket of goods. The Republicans’ “chained CPI,” which President Obama is offering, assumes if they’ll use cheaper substitutes, their inflation index need not go up.

AFL-CEO President George Meany once told me 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. How many corporate CEOs, university presidents or school superintendents would buy this argument? “You don’t need an inflation adjustment. Just send your kid to a cheaper college; rent that summer home instead of buying it; drive that car another three years; wear blue jeans instead of $2,000 suits; make more meals at home. You’ll be just as well off.”

There are cuts that would reduce the deficit. Like Defense. Cutting Social Security won’t. Giving billions to weapons profiteers and beans to grandma makes no fiscal sense either morally or militarily.

It’s appropriate to fashion an inflation index more precisely for the elderly poor. In fact we have one: “the elderly index” (with more weight on health costs, it would increase, not decrease, their rightful benefits). But that’s neither what’s being offered nor what’s going on here. The negotiators are simply cutting costs to cut costs — and in a program that’s irrelevant to the deficit.

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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Nicholas Johnson has written more on this topic at “Social Security, Inflation, and Punishing the Poor.”
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Addendum, December 27, 2012
Based on some reader comments on the Press-Citizen's online presentation of this column, and a personal email, a restatement of my position may be useful.

Here are excerpts from the incoming email (author's name omitted, as I have not yet requested, or obtained, permission to use it):

I don't disagree with several of the proposed ideas for shoring up Social Security's finances, [but] I must strongly disagree with [the column's] premise that Social Security is a "standalone" program that doesn't contribute to the deficit. That's an old Democratic talking point from almost two years ago . . ..

Here is my response:

1. First off, let's distinguish two categories of federal public programs. (a) Most, and those most appropriately on the chopping block, are supported by the federal income tax. Examples: the entire federal judicial branch and Department of Justice; the entire legislative branch; the Defense Department and almost all other executive branch departments and independent agencies. (b) Others are supported, at least in significant part, by a designated and dedicated revenue stream. Examples: the highway fund (gasoline tax) and Social Security (payroll tax). I don't know how much of the National Parks budget is provided by entrance fees (they were free in the 1950s), but that might be another.

2. What the "fiscal cliff" is (or ought to be) about, at a minimum "primarily about," is matching the revenue stream provided by the federal income tax and the programs that revenue is used to support -- along with what is borrowed from the Chinese (and Americans) to make up the difference when income tax revenues aren't enough to cover those costs. That's why the dialogue has been about "tax increases" and "program cuts."

3. Interest on the national debt is $432 billion a year. That is an "expense" that needs to be covered with federal income tax revenues. It is not. We are running deficits that annually add to the national debt. We have to pay that interest if we don't want to suffer the consequences of default. So we have to borrow more to pay the interest on what we borrowed before, thereby increasing both the national debt and the annual interest on that debt.

4. During the years that Social Security's revenue stream exceeded its outflow of payments the resulting reserve had to be invested somewhere. It was invested in U.S. Government bonds. Those bonds earn interest. That interest contributes to its revenue stream. If past and present presidents and members of the House and Senate were irresponsible enough to fail to raise income tax rates sufficiently to be able to cover those interest payments when they became due, that is not really the fault of those administering the Social Security Administration, those paying in, or those receiving benefits.

5. When it is asserted that Social Security is good until 2020, or 2037, that is not to say that its revenue from the payroll tax will be enough to cover all payments during those years, it may be only to say that the payroll tax revenues, plus drawing down on its investments in government bonds over the years, are enough. This is analogous to the finances of a construction worker, or farmer, who (hopefully) has a reserve to carry them through hard times; sometimes the revenue stream will be more than they need, and some can go into savings and investments; other years the revenue will contribute, but won't be enough, and they'll have to draw down on those savings, set aside for that purpose.

6. Now it is apparently the case that, whatever the year may be, a time is coming when the reserve will have been totally depleted and the revenue stream will not be enough to cover the promised payments to the retired recipients -- especially since the payroll tax was reduced by one-third! There are many ways that this can be fixed. Some are itemized in the column. But these are challenges that arise within, and can be resolved within, the Social Security system. They are unrelated to federal income tax rates.

Note that the highway trust fund has a similar challenge. It's dependent on the gasoline tax; that's a "user fee" of sorts: the more you use the highways the more gas you buy, and the more gas you buy the more you will contribute to the construction and maintenance of the highways. The problem? When mpg is increased by 50% to 100% or more, less gas is sold -- and the hybrids and coming electric cars buy little or none. What to do? One proposal is that a fee be levied on drivers based on miles driven, rather than gas purchased (an option on which I don't mean to be expressing an opinion). The point is, that the highway fund's challenge, and potential solutions, like those confronting Social Security, don't depend on federal income tax rates or total revenue either.

Both need to be addressed. But neither is properly a part of a fiscal cliff discussion regarding the setting of federal income tax rates (or other tax reform proposals) or the budgets of agencies without their own revenue streams.

7. If the federal government is paying interest on the money it has borrowed from the Social Security trust fund I don't think that can fairly be cited as a "cost" of Social Security being paid for by federal income tax payers. That is simply a part of the cost of the federal government's having borrowed money in the past (rather than raising income tax rates high enough for a pay-as-you-go funding of wars and other expenses) -- regardless of the creditor from whom the money was borrowed.

And if the federal government is, actually, transferring federal income tax revenues above and beyond the interest payments owed to Social Security, that is also not the fault of Social Security. The Social Security Administration does not have the constitutional or legislative authority to revise itself. It must look to Congress to make revisions in the formulas, if any are urgently needed now. But the options available for doing that involve neither federal income tax rates going up or down, nor cuts or increases in the funding of federal programs that do not have their own revenue streams.

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The following Letters to the Editor, criticizing my column, were published in the hard-copy editions of the Iowa City Press-Citizen January 2 and 3, 2013, and are reproduced here in accord with my belief in what used to be the F.C.C.'s "Fairness Doctrine" (now repealed). Needless to say, I disagree with much of what the letter writers assert, for reasons outlined in the column, the seven-point "Addendum" of December 27, 2012, set forth immediately above, and in the prior blog entry, “Social Security, Inflation, and Punishing the Poor.”

Local columnist plain wrong on Social Security
Brenton Smith
Iowa City Press-Citizen, January 2, 2013, p. 9A
Nicholas Johnson’s recent guest column (“Proposed Social Security changes punish the poor,” Dec. 26) is a combination of misstatement of fact and faulty logic.

• First, Social Security did add $103 billion to the 2011 federal budget deficit to pay for payroll tax holiday. It has added to the budget deficit every year since the mid-’70s when the government created the EITC to offset the high cost of payroll taxes for lower wage workers. By law Social Security adds to the Federal budget deficit every year.

• Second, Johnson states that savings from indexing benefits would fall on the elderly poor. Social Security benefits are connected to past contributions, not need. The majority of the changes would hit those who contributed the most in the past — in other words, high wage earners.

• He concludes that a fairer way to change Social Security is to punish the young by raising taxes on workers. This version of fair means that we take from those who get the least from Social Security to give to those who have taken the most. Specifically, the Urban Institute research shows us that the returns of Social Security have declined every decade over its 77-year existance. According to its research, people who retired before 2011 collected a positive return; people retiring after 2011 lose a progressively larger amount.

The writer is right about one thing: the savings from indexing benefits will not reduce our deficit. It will help perserve the system for the elderly poor in the future, ones who will be subjected to much more severe cuts than what we are proposing today.

Brenton Smith
Marietta, Ga.

Here are the Press-Citizen online readers' responses to Smith's letter (including my own, only because it is helpful to put in context the comments of the other two readers):

Nicholas Johnson · Top Commenter

I welcome -- because I have tried to encourage -- public discussion of these issues, including this letter writer's, and others', criticism of some of my points. Indeed, I have now reproduced his letter within one of my blog entries on the subject.

However, since I have already addressed most of this letter writer's points, there is little to be gained with perpetuating a 'Tis-'Tain't series of exchanges in this Press-Citizen comment space that merely repeat what's already been said.

For any readers who would like more on the subject, if such there be, I'll simply refer you to two prior blog entries (one of which includes the earlier Press-Citizen column to which this letter writer is responding, as well as his letter):

"Social Security, Inflation, and Punishing the Poor," Dec. 19, http://fromdc2iowa.blogspot.com/2012/12/social-security-inflation-and-punishing.html

"Social Security: The Press-Citizen Column," Dec. 26, http://fromdc2iowa.blogspot.com/2012/12/social-security-press-citizen-column.html

Reply

Bob Vander Beek · Top Commenter · Case Western Reserve University

Thanks, Nick, for directing us to both. At risk of delaying anyone following that more extensive coverage by adding here, much as I try I can't figure out his explanation that SS does contribute to the deficit. Yes, money was taken from SS to offset the payroll tax holiday. Yet any way I look at that it was taking from SS to lessen the budget deficit.

Reply ·

Sam Osborne · Top Commenter

Social Security does not have a return on investment problem; it has an obligation of return of the investment that has been made by those that have built and maintained the society from which the current generation benefits by being able to work in support of themselves and loved ones, in the continuance the system and in payment of the user fee they owe those that built what they enjoy and will pass on in good enough shape to collect their user fee.

The right-wing propaganda in the above letter salves pretence of some wannabe moneychanger and the real interest of plutocratic government of the few, by the few and for the few. This letter does so in hiding disregard of the fact that Social Security (SS) is not a debt problem as the confabulator pretends. In fact the SS Trust Fund (SSTF) is owed money and has kept the national debt, that Republican pretend to moan about, from even being greater by 2.8 trillion dollars.

This is the amount of SSTF money spent for general government outlays---funds from a “wonderful” flat tax paid in full by working people making under $116,000 per years, but escaped by the rakers-and-takers on the huge portion of their income above the cap. To wit, on the 12 million Mitt Romney finally reported as taxable income, he did not pay any on $984,000 of his rake and take that a blind trust supposedly keeps him from even knowing how he got it.

So SS not only pays its way in terms of benefits paid out to recipients, its SSTF potion paid in has also been paying the nation’s bills in uncompensated but extended benefit to the 00.006% few that have hoarded the nation’s wealth (like Mitt). And the hoarding is been done in compound expense of 99.994% of the American people that make up a declining middle class, working poor, totally destitute and younger generation trying to get a start from under a huge pile of educational debt.

It is time to do away with the trust fund as excess flat tax and remove the cap so all pay FICA in full. This will reduce FICA tax for the people that actually work as the heavy lifters that keep our nation going and growing. SS is and has been more than sound and will run just fine as the user-fee it was intended---hereby the current working generation pays the fee to the retired generation that built and maintained the system from which the next generation can make a living.

This works just fine as long as we are willing to share the declining amount of work that manually needs to get done in our land. Due to automation and robotization we increasingly do not have a shortage of workers, we have an increasing shortage of manual labor jobs that need to get done and should cut the work week to 30 hrs and raise the minimum wage so that this great nation can continue to do and be as it was founded and fought for:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.” ~ July 4, 1776

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Johnson Refuses to Accept Reality
Tim Borchardt
Iowa City Press-Citizen, January 3, 2013
I read Nick Johnson’s recent column on on Social Security. With Johnson as a University of Iowa law professor, it is easy to understand why the quality of education in the U.S. is in decline. Johnson fails to recognize the fundamental truths. People are living longer. We are taking more out of the Social Security funds than we are contributing. When Social Security was passed into law it was a supplement to a retired individual’s income.

I believe every individual has the right to collect what they have paid in. Once they have collected 95 percent of their contributions, they need to be means-tested.

There are real solutions to this issue. I find it very difficult to recognize Johnson as an expert when he refuses to except reality.

Tim Borchardt
Iowa City

William M Duffy · Top Commenter · Owner/Partner at Stuart, Carmen and Associates It is ironic that a man that uses the word "except" when the correct word is "accept" has the audacity to imply that the person he is in disagreement is a bad educator or, in effect, stupid.

Sam Osborne · Top Commenter It is easy to care little about what a letter writer thinks in a missives that reflects such little regard for the wellbeing of others.

When someone so easily can verbally displays such little regard for others, it is equally easy to give little regard to what they think. And most easily so when what they have to say reveals itself to be a product of the kind of poor education that the letter writer tries to make the responsibility of another.

Unbeknownst to this letter writer, Social Security is not and never has been a savings account. It is a user’s fee paid by the current generation to the previous generation that built and preserved the culture that enables the citizenry to continue to provide food, clothing, shelter and a bit of leisure for themselves and the ones they love.

Social Security was enacted in the depths of the Great Depression---times far more dismal than the present period that has been made less dismal because of the kind of General Welfare provisions in the Social Security Act. When President Franklin D. Roosevelt (FDR) signed it into law only a relative handful of citizens had any private pension fund (which is still true for many today). And if they did not come of family connections to the kind of 00.006% wealthy of the day, they had no one to turn to for a handout or up. And, charities were as hard pressed then as they are now. They just could not take Mitt Romney’s advice and ask mom and pop; so a bulk of Americans (Mitts Romney’s 47% or the 99.994% that increasingly must just try to make end meet) were doomed to later years of uncertainty in certain hardship---as FDR described it, "poverty-ridden old age."

Thanks to FDR's commitment to the Constitutional principle of the General Welfare, Americans that have done the heavy lifting in our land get paid their monthly Social Security user’s fees, disability benefits that include the blind, and unemployment assistance funds administered by the states.

In doing this the Socials Security Administration is run with the lowest administrative overhead of any public or private organization I the world, a 1% of its total cost. Thus it is the bargain portion of administering funding for the Medicare and Medicaid programs and it paid for all medical service directly the nation would have billions for more extensive health care for all.

In signing Social Security into law in 1935 FDR in his words saw it “a cornerstone in a structure which is being built but is by no means complete.”

This great president prefaced this expression of faith in a future, progressively passed by the Greatest Generation into our hands, with a recognition that what had been done then would for us and our posterity always be a work in progress---as with the Preface to the Constitution’s intent “to form a more perfect Union”---best we ever know it comes dropping slowly:

“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”

So today, as we mull over what we have read in the newspaper, it is up to us. Do we adopt the dismal view presented in some dismal letters like this and thus follow them as a self-fulfilling prophecy of what will become dismally true? Or do we move on in the spirit of being a generation as caring and engaged as the Greatest?

Coming from an Irish heritage that had an appreciation of a story so good that you hardly needed to add to it, but realizing that a good one was even better with a bit of improving on the truth, when we reflect on our history, be it personal or as a nation of people, we tell ourselves and others who we are and who we want to live among. I like Nick Johnson and all the many others with whom good fortune lets me travel life.

Like Nick and many others, I too wish no one ill. And likely a bit less caring than Nick and some, I am content to distantly encounter a dismal few so that they can live alone as miserably as they seem content to let others suffer want alone. But, I’d go to a White House Beer Summit and share one wit’ ‘em---hey, am I really a nice guy, or what? Meantime, I do not care to live in this letter writer’s dismal reality.

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[Note: One of the purposes of this blog is to provide, if not permanent access to my published newspaper columns, at least relatively more permanent access than is usually provided by newspapers. The column obviously draws from the blog entry “Social Security, Inflation, and Punishing the Poor,” originally posted here a week ago, December 19, 2012. The challenge was to see if there were 650 words somewhere among the 2179 that make up that blog entry that could capture enough of the essence of it to be worth publishing as a column. The answer to that, of course, must rest with others than myself.]

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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Rappelling Down the Fiscal Bluff

December 16, 2012 2:25 p.m.; December 19, 2012, update: For a classic example of why the cliff is preferable to what will come out of December negotiations, see, "Social Security, Inflation, and Punishing the Poor."

[Newtown comment: Think that "guns don't kill people, people kill people"? Think again. Within hours of each other 20 elementary school children were attacked in both the U.S. and in China. The American children died. The Chinese did not. Why? No guns. The attacker used knives. A gun in the home is 16 times more likely to kill a family member than an intruder -- as happened to Lanza and his mother in Newtown. There are dozens of things we could do to cut the carnage, while letting hunters keep their rifles. Come on, Iowa and Washington legislators. Are your NRA campaign contributions and support, and the necessity of your re-election, really enough to justify these deaths and your silence? It was an appreciated, thoughtful and heartfelt appearance by President Obama in Newtown. But so far as I know even he has yet to mention the word "gun" during the entirety of 2012. See, "Guns Do Kill -- 30,000 Americans a Year."]

Why Cliff is Clearly the 'Least Worst' Win-Win Solution

Don't get me wrong. There is no painless way out of our nation's fiscal quicksand, only a variety of worst solutions. Of them, which is the "least worst"? That's the only issue. I think it's "rappelling down the fiscal bluff." [Photo credit: multiple sources.]

The numbers.

Our credit card debt is $800 billion, headed toward $1 trillion. Student loan debt just passed $1 trillion in 2012. Total mortgage obligations of $13 trillion approach those of the federal government, a debt of $16 trillion (roughly half of which is owed by foreign investors).

Can't just blame "the politicians." Those first three (totaling $15 trillion) represent debt we, individually, voluntarily, took on. We even bear some responsibility for the federal debt, when we say we "hate Congress," but think our local congressperson is just terrific and return her or him to Washington.

Of course, those aren't our only debt obligations. We may owe something on our car, farm or manufacturing equipment, a loan from a friend or family member, a gambling debt. But let's limit ourselves to those four. (Because if you look at unfunded future obligations of the federal government, we're talking four or more times the present federal debt.)

The total? Let's say $31.4 trillion. Why $31.4? Because if we count every newborn baby and elderly person in the last days of their life, there are now 314 million Americans. So it makes the math easier. Each of our shares of all this debt? That's right, $100,000.

Then there's state, county and city debt. Iowa's total: $14.4 billion; $4,700 for each and every Iowan. The City of Coralville's $279 million debt is $14,700 for every Coralville resident. Jason Clayworth, "Iowa's debt a record $14.4Bl; Report: Amount owed equivalent of $4,704 per resident," Iowa City Press-Citizen, November 24, 2012 (originally in Des Moines Register).

And don't forget the accumulating and compounding interest. On the federal debt alone it runs $432 billion a year. Think about that. I remember when President Lyndon Johnson was insistent on holding the federal budget -- that is, all the expenses for the Great Society programs, the Vietnam War, the Congress, every government agency and employee, all the courts and the Department of Justice, everything -- to $99 billion or less. We now have a single budget item that is over four times that much -- the interest on the national debt!! More than a billion dollars a day. That's $1375 a year in interest alone for every man, woman, and child in America.

That's $432 billion, nearly one-third of our federal government's annual expenditures, for which we get nothing in return, absolutely nothing -- except for the credit rating (for raising the debt limit and paying others what we owe them) that enables us to borrow even more. No purchases of raw materials or equipment, no roads or bridges built, no schools, no social services for our people. Nothing. It is, as is said in another context, like paying what you owe on a horse that has already died. Whatever we once got for it, like an endless war leading nowhere, was in the past, not now. It is also the case that those whom we pay have done nothing for the interest paid them; no work; they've provided us no goods or services. They've just cashed our checks, deposited the money, or spent it on luxuries.

Ever wonder who gets all that money? Why, the bankers and other investors, of course; some in this country, many abroad. Each of us has a part time job working for the banks -- for which we have to pay them, they don't pay us.

The Congressional cliff is rational and has precedent.

(1) What has come to be called the "fiscal cliff" is the result of an act of Congress. It was the majority's judgment at the time that it was the best course. It was a product of our constitutional, representative democracy. That does not make it really wonderful. But it does mean it is not unconstitutional, illegal, the result of a military coup, or imposed upon us by the North Koreans.

We voters see our House and Senate as dysfunctional. It's not all the time. For example, it can pass bills that name post office buildings. Indeed, that was 20 percent of all the bills that were passed recently.

(2) But there are some things the members realize need to be done that they are simply not able to do.

Some involve reverse "tragedy of the commons" conflicts, like closing military bases. Closing unnecessary bases can save American taxpayers a lot of money. It may even improve our military readiness. Members realize that. Everyone sees the benefit; but no one wants to close a base in their district. How can Congress deal with such a dilemma? Create a base closing commission to come up with a proposal that is not subject to revision or amendment, bring it back to Congress, and have Congress vote it up or down, yes or no.

Others involve issues that are complicated, and sometimes technical, as well as controversial. What did Congress mean when it created the 1927 Radio Commission (that later evolved into the Federal Communications Commission) and told it to award radio licenses, and otherwise regulate licensees, according to "the public interest, convenience, and necessity"? It was little more than handing off the mystery of radio broadcasting, and its regulation, to a new independent regulatory commission, and saying, "Here's a problem; you solve it."

(3) Congress' "solution" of a "fiscal cliff" is similar. "Here's a problem that must be solved," it realized. "We can't solve it now, and we doubt that we'll ever be able to. If we do, well, great. But if we continue to kick the can down the road, here's what will happen January 1, 2013. Tax rates will go back to the levels that existed during our last prosperity, and defense spending -- now greater than that of all our adversaries, and allies, combined -- will be cut to more reasonable, though still more than adequate, levels."

Is that a happy solution? No, of course not. But it was a realistic solution, a rational way out, a pragmatic move -- and one for which there is precedent.

This is as much about politics as economics; why rappelling the bluff is a win-win.

(1) The fiscal cliff, or bluff, is as much or more about politics as about economics and finance. There's no shortage of ideas about what we should do from economists, finance professors, journalists, and other citizens. That's not the problem. The problem is that our constitutional system of governing, especially during times of ideological extremism, coupled with the increasing power of the special interests funding our elected officials' campaigns, makes it somewhere between very, very difficult and impossible to come to rational resolution.

(2) That means that there has to be something in it for everyone; both political parties have to "win" this one. Rappelling down the fiscal bluff makes that possible.

(3) President Obama wants to raise taxes on the wealthiest 2 percent, but can't get the Republicans to agree. Although many of the wealthiest Republicans have no real objection to having their taxes raised, and even see the need for doing so, their elected representatives have signed Grover Norquist's pledge that they will never raise anyone's taxes.

Both will win something and lose something by jumping off the cliff. Obama gets his higher taxes on the wealthy -- but gets an increase in middle class taxes, too (which he opposes). The Republicans can keep their pledge; they did not vote to raise taxes on the wealthy; January 1 merely triggered that increase without a vote -- however, there has been a tax increase.

(4) Once tax rates have gone back to more rational levels, both Republicans and Democrats can take credit for voting to reduce middle class taxes to some degree, by voting to do so after middle tax rates have taken the cliff's automatic jump. (They could also keep some of that additional revenue by not reducing them back to current levels.)

(5) Similarly, partisans can take credit for both "increasing" defense spending (above the post-cliff-cut levels) -- while, hopefully, also taking credit for the savings brought about by the cuts that are not restored.

(6) This leaves the matter of the automatic cuts in social programs -- a win for Republicans and a significant challenge for Democrats (not to mention the millions of Americans dependent upon those programs). Even here a win-win of sorts is possible.

Win or lose, Democrats can be seen to be fighting the good fight for their natural constituencies against those heartless Republicans. On the other hand, the more rational among the Republicans seem to have grasped from the last election that they cannot continue to alienate women, minorities, immigrants, youth, and the elderly and still maintain a healthy political party capable of winning elections. Reversing course, and surprising everyone, might actually be an opportunity they would seize.

Why this is a better deal than any eleventh-hour "compromise."

I don't think this is about our taxes at all. Not yours, not mine. You know what I think it is about? Corporate taxes -- or the lack thereof, the exclusions, the deductions, the offshore deals, the Swiss bank accounts.

Why do I think so? I've been reading the White House guest list. Who are these folks who are evidencing less opposition to having their taxes raised? How might they actually end up with more money at the end of every year, even if their rates go up a notch? By having a very much larger overall income on which to be paying those taxes. Here are a few from that long line of recent visitors:

David M. Cote, chief executive of Honeywell; Daniel Och, the billionaire founder of Och-Ziff Capital Management; Gary D. Cohn, president of Goldman Sachs; Greg Fleming, head of wealth management at Morgan Stanley; Frederick W. Smith, the chief executive of FedEx; Marc Lasry, who runs Avenue Capital; the real estate tycoon Barry Sternlicht; Tony James, president of the Blackstone Group; Roger Altman, executive chairman of Evercore Partners; Robert Wolf, a longtime UBS executive who recently began his own firm, 32 Advisors; Blair W. Effron, co-founder of Centerview Partners; Mark T. Gallogly, a Blackstone veteran who founded Centerbridge Partners; Lloyd C. Blankfein, the chief executive of Goldman Sachs; Randall Stephenson, the chief executive of AT&T; Marriott’s chief executive, Arne Sorenson; Doug Oberhelman of Caterpillar; the president of the Business Roundtable, Rex W. Tillerson, the chief executive of Exxon; Andrew N. Liveris of Dow Chemical; Jeffrey R. Immelt of G.E.; Alexander Cutler of Eaton; Bill Dunkelberg, the chief economist at the National Federation of Independent Business.

There are undoubtedly many more, but this should give you a clue as to what we're up against. Nelson D. Schwartz and Jonathan Weisman, "Unlikely Backers in a Battle Over Taxes," New York Times, December 12, 2012, p. B1. As the authors comment regarding this cast of characters, and why they might be lining up to support an increase in their taxes, "their stance in favor of lower corporate tax rates could actually benefit their bottom lines in the long run."

And that's what our president, the Democrat, is up to. You can only imagine what will be the source of any gains by the Republicans in these "negotiations" between the White House and the Congress.

No, I think I'd rather we just rappel down that fiscal bluff, thank you. That's the least worst option I see.

Conclusion.

So that's the idea. When you're lost in the woods, as America seems to be at the moment, rappelling down the bluff, however frightening, might just be a better way out than continuing to wander in a dark woods filled with wild dogs without a compass or GPS receiver.

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