Posted on Wednesday, December 1, 2010
Possibly the most amazing aspect of the Commission on Fiscal Responsibity's drive to reduce the federal "deficit" are proposals by its chairs and others to cut benefits payable by Social Security, although the program pays its own way and has generated robust annual surpluses, now totaling $2.4 trillion and projected to reach $4.2 trillion. Those assets will enable Social Security to pay its promised benefits in full until 2037 and about 75% thereafter. Two measures that draw strong support in polls -- extending the payroll tax to higher pay and slowly increasing the payroll tax rate (1/20th of 1 percent per year for 20 years is one version) -- would fully fund the program for 75 years. The program's own modest shortfall -- about 27 years away -- is easily fixed with these proposals that the public supports.
Moreover, Social Security does not and, indeed, cannot add to the federal deficit: It is permitted to pay benefits only to the extent it has funds on hand and is prohibited from borrowing. Nonetheless, the November 24 Washington Post presented summaries of three "bi-partisan plans to reduce the deficit" which propose multiple Social Security benefit reductions. The commission co-chairs propose to cut benefits for the top 50% of earners (which hits many with quite modest incomes) and to raise retirement age (another benefit cut); both benefit cuts and raising retirement age poll badly. And, despite assurances by reduction advocates that those already retired and nearing retirement would be spared, all three plans would soon trim the annual cost-of-living adjustment (COLA) formula. Advocates claim that a new "chained" COLA would more accurately reflect price increases by taking account of consumer substitution of less costly items in the "basket" used to measure price changes; a favorite illustration is switching from meat to chicken.
Decades ago, a book entitled The Poor Pay More demonstrated that consumers in low-income areas have limited choices. Hence substitutions may occur more readily in some economists' position papers than in local markets, often high-priced "convenience" stores. Moreover, the chained version does not take adequate account of the typically higher medical care costs of older people. Further, the COLA measures the percentage difference in prices between two years ago and last year; the resulting percentage usually lags behind the current year's typically rising prices.
The usual "reform" analysis address costs but seldom considers what benefit reductions mean to retirees, their families and the economy. Deficit hawks seem oblivious to the fact that Social Security provides the largest portion of senior income. And, as people age, their work income, if any, gets progressively smaller and Social Security's importance becomes commensurately larger. And with advancing age, older people do less for themselves and either pay for services they formerly performed or go without. After the meltdown of value in 401(k)s and IRAs, Social Security has become even more vital than in the past. Meanwhile, the implementation of already enacted higher retirement age means lowered benefits for each new group of retirees.
Despite all this, the Bowles-Simpson and bi-partisan formula is "cut, cut, cut." They seem not to notice that curtailing Social Security recipient income translates into lost purchasing power that further translates into lost sales, that further translates into employee layoffs, that further translates into less purchasing power, snowballing into more and more lost sales revenues and jobs.
Another "bi-partisan" proposal would establish a Social Security/Medicare payroll tax holiday in 2011. That would increase the Social Security funding shortfall -- a curious thing to do when the claimed justification for surgery on Social Security is to reduce the federal deficit, lower burdens on future taxpayers or to enable Social Security to meet its long-term obligations. Mark that for the "you-gotta-be-kidding" file.
To demonstrate willingness to impose "pain" broadly, Bowles-Simpson (some now call it the B-S plan) would eliminate the recipients of ALL "tax expenditures" (that is, tax breaks) with the home owners' mortgage tax deduction at the head of their list. By focusing on that popular tax break, they practically insure that tax expenditures won't be touched. File in the "you-can't-be-serious" category.
Most informed observers agree that the budget-killer biggie is galloping health care cost increases besetting public programs, such as Medicare, Medicaid and CHIP (Child Health Insurance Plans), and private medical care insurance. B-S proposes a non-mandatory cap on total Medicare outlays. If that doesn't work, B-S proposes studying the matter. Where do they find the courage for such bold initiatives? File in the "this-goes-beyond-kidding" folder.
One of the "bi-partisan" proposals for Medicare would no longer reimburse patient outlays but would provide prospective patients with "vouchers" but without limiting what providers could charge. File with "solutions-that make things worse."
One would not know from the Washington Post presentation that Democratic Representative Jan Schakowsky, a commission member, offered a comprehensive proposal that did not include benefit reductions, but would curb deficits by imposing limits on defense expenditures (a feature it shares with other plans) and initiate improvements in Social Security revenues that enjoy popular support. The Post presentation notes only that "More partisan efforts approach the problem differently." Slip this into in the "very informative" folder.
In sum, major portions of the Washington Post's "bi-partisan" proposals carry a fictitious label (that Social Security contributes to deficits) damaging, unnecessary and/or fruitless remedies and offer savings on tax expenditures that are so politically unpalatable as to practically insure rejection.
While unlikely, the commission might cobble together the votes for a plan of sorts. But, the slanted, incomplete Washington Post presentation does not hold much promise of realistically addressing the nation's actual needs to cut flab rather than essentials.
Merton and Joan Bernstein, Coles Prof of Law Emeritus, Washington University