Social Security and the Obama Cave-In

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The American Prospect

Social Security and the Obama Cave-In

The deal between the White House and congressional Republicans includes changes to the cost-of-living formula that amount to needless cuts for seniors.

Once again, President Obama seems to be on the verge of folding a winning hand.

Widely leaked reports indicate that the president and House Speaker John Boehner are making a fiscal deal that includes hiking tax rates back to the pre-Bush levels with a threshold of $400,000 rather than the original $250,000, and cutting present Social Security benefits.

Obama, the reports say, will now settle for as little as $1.2 trillion in tax increases on the rich rather than the $1.6 trillion that he had originally sought. The difference, in effect, will come out of the pockets of workers, retirees, the young, and the poor.

Especially foolish is the cut in Social Security benefits, disguised as a change in the cost-of-living adjustment formula. Before getting to the arcane details of the formula, here’s the bottom line. The proposed change will save only $122 billion over ten years, but it will significantly cut benefits for the elderly.

Because the cut is in the form of a change in the Consumer Price Index (CPI), the longer you live, the more is the total cut. On average, the cut is about 3 percent a year, but if you live twenty years after you start drawing benefits (the average), that adds up to over ten thousand dollars.

Put this in the context of the reliance of the elderly on Social Security. More than 70 percent of all recipients depend on Social Security for more than half their income. The average Social Security benefit is less than $15,000 a year, and in recent years all of the cost-of-living adjustments and more have gone to defray the annual increases in Medicare premiums and other health costs.

One interesting detail in Obama’s apparent cave-in on Social Security is the role played by some prominent liberals, notably Robert Greenstein of the Center on Budget and Policy Priorities (CBPP).

The proposed change involves a shift to something called the Chained CPI. Supposedly, when the price of something goes up, people substitute cheaper products. The application of the Chained CPI to the elderly (who are already scrimping) is problematic—more on that in a moment—but Greenstein has had kind words for disguised cuts in Social Security via the Chained CPI.

In a piece last February, Greenstein and colleagues wrote that a shift to the Chained CPI would be acceptable if it protected longtime Social Security recipients and those receiving disability benefits via Supplemental Security Assistance. The respected Greenstein’s support provides crucially important political cover for Obama’s cave-in. 

Why does the CBPP, which exists to defend social programs, accept this disguised cut?

There seem to be four major reasons. First, Greenstein’s operating principle is that programs for the poor, above all, need to be protected. Second, Greenstein has long been of the belief that making progress on deficit reduction helps safeguard programs for the poor. Third, Greenstein is always eager to remain a player—and providing this support to a beleaguered White House makes him a player par excellence. Finally, Greenstein also likes to stay on good terms with both the budget-balance crowd and the liberals. 

But this is one of those times when you need to decide which side you are on. 

I have a lot of admiration for the role Greenstein has played over the years. But on this crucial issue, I think his calculation is just plain wrong. Look at budget politics over the past decade. Joining the call for deficit reduction has hardly saved programs for the poor. Discretionary domestic spending, from which programs for the poor come, is at its lowest share of GDP since the Eisenhower years. 

The siren call of the austerity lobby is that Social Security spending is “crowding out” other social spending. But that doesn’t hold up either. Even in today’s weak economy, Social Security is in surplus. If we got back to full employment with decent wage growth, increased payroll tax receipts would keep Social Security in surplus indefinitely.

The other tactical error here is to allow the White House and Speaker John Boehner to play off ordinary Social Security recipients, many millions of who are just above the poverty line, against the very poor. Greenstein’s thinking seems to be that it’s okay to sacrifice other near-poor elderly if that conserves money for the poorest.

But it’s unconscionable to cut Social Security at all when then president is proposing to reduce the proposed taxes on the wealthiest by $400 billion—more than three times the savings of the planned cuts in Social Security.

Late yesterday, as the terms of the deal were leaked, Greenstein’s name was widely dropped as a key supporter. I reached Greenstein by e-mail late last night to ask if he really supported the proposed deal, and this was his response:

We don’t have enough info yet.  The White House tells me they will be seeking all of the protections we have said are essential, but the White House and Boehner have not gotten yet to this part of the negotiations, and the White House offer does not spell out specific details on the protections.  We are withholding judgment until we see what the details of both the chained CPI proposal and the overall package look like.

In other words, if the deal protects the poorest, SSI recipients, and longtime Social Security beneficiaries, Greenstein is on board. Since the austerity lobby has always invoked the need to safeguard the very poorest, this looks like where the deal is heading.

This budget agreement is very dubious politics for Obama and the Democrats on several grounds. For starters, Social Security cuts, disguised or otherwise, should not be in this package at all. Politically, such a deal erases the bright line that is the Democrats’ single strongest distinction from Republicans: We defend Social Security; they are willing to sacrifice it. Further, the politics of allowing the struggling, not-quite-poor elderly to be played off against the very poor are just appalling.

One other set of enablers are those liberals who say that at least a disguised cut in Social Security is not quite as bad as raising the Medicare eligibility age, a Republican demand that Obama has rejected. This chorus includes the sainted Paul Krugman, another resolute liberal who ordinarily earns nothing but our thanks and appreciation. 

But saying that cutting Social Security is not quite as bad as cutting Medicare sets a pretty low bar. Neither should be cut.

What happens now? Progressives in and outside Congress need to shoot down this trial balloon. They need to keep the heat on Obama to consent to nothing of the sort.

About that “Chained CPI,” (since you asked):

The premise of the “Chained CPI” is that the standard CPI overstates inflation because people regularly substitute products when they are more expensive. If beef is too pricey, people switch to chicken. 

There are two fallacies in this premise as applied to seniors. Most seniors already live so close to the margin of poverty that they have already done all the easy substituting, unless we expect them to further downshift from chicken to cat food, or to choose between filling stomachs and filling prescriptions. 

Moreover, the CPI as applied to seniors understates the true impact of inflation, not overstates it. As several studies have shown, the cost of health care has been increasing at more than twice the general rate of inflation, and seniors spend a far larger share of their incomes on medical care than younger Americans do.

To add insult to injury, the current very low-interest environment and the theft of corporate pensions leave the elderly with depleted incomes. If anything, rather than chaining the elderly to reduced annual CPI adjustments, their cost-of-living adjustment should be increased.

This promises to be an epic showdown. We will soon learn what Obama, the progressive community, and congressional Democrats are made of.

Robert Kuttner

Robert Kuttner is co-founder and co-editor of The American Prospect magazine, as well as a Distinguished Senior Fellow of the think tank Demos. He was a longtime columnist for Business Week, and continues to write columns in the Boston Globe and Huffington Post. He is the author of A Presidency in Peril: The Inside Story of Obama's Promise, Wall Street's Power, and the Struggle to Control our Economic Future, Obama's Challenge, and other books.

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