Tinkering With The Social Security Inflation Adjustment
Since 1975, benefits of Social Security recipients have been adjusted for inflation every year. Last year Washington found a cute way to stiff recipients out of this cost of living adjustment (COLA). Now both parties there are working on a plan to ensure that older Americans get a smaller adjustment every year into the future.
The chosen mechanism to ensure this is something called the “chained consumer price index,” which may soon replace the traditional Consumer Price Index (CPI) measure for computing benefit inflation adjustments. The chained CPI does this by making an assumption, unprovable but probably correct, that consumers shop for cheaper products when times get tough. In doing so they spend less for similar goods so their personal inflation is less. This, in turn, means a smaller annual inflation benefit increase is appropriate.
It’s an interesting theory. But here’s some real world facts about inflation that Washington policy makers conspicuously choose to ignore. Though medical co-pays are soaring, they are not computed when figuring the CPI, and hence don’t get added in to present inflation adjustments for Social Security recipients. New fees (over formal charges) from banks, airlines and other businesses are soaring, too, but they don’t get figured in. The extra costs of paying for government services that are no longer covered by taxes are not figured in either.
In other words, real world inflation is a lot higher than the CPI on which Social Security inflation adjustments are presently based, and more than offset so-called “chained” inflation reductions.
Chained inflation figuring applied to Social Security is not just a Democratic Party idea. Not just a Republican Party idea. It’s a Washington gimmick meant to stiff Social Security recipients.
No matter which party you support, its reps inside The Beltway are out to stiff you if you’re one of the 55 million Americans who today receives Social Security benefits. But they won’t do it in an honest way. You’ll be diddled with an accounting tool.
More from this writer at http://cootavengers.com/
44 Responses to “Tinkering With The Social Security Inflation Adjustment”
“Diddled” by a crooked American investment firm, or, “diddled” by Congress and the American Social Security Administration, one wonders why anyone would risk the financial security of their senior years as an American citizen. Especially considering our tragic Health Care, so called, “system”.
Why should anyone be surprised that Washington would come up with a plan that is a cut in benefits, but calls it another name? Are they so arrogant that they think the American voter is so stupid they can not see what the plan does for the retirees?
Everyone knows that there are going to be cuts in benefits or increases in the tax paid to support Social Security, and even then it will go broke unless the baby boomers begin dying out n larger than expected numbers. The solutions are small.
1, Cut benefits now and extend the solvency for a few years.
2. Maintain benefits now, but increase the full retirement age to 70 for those now in the 40′s, like Tip O’Neill and Ron Reagan did in the 80′s when it was raised to 67 from 65.
3. Leave it alone and let it go broke.
This proposal is a bandaid on an injury that requires surgery. But why do we expect anything different from a group of individuals protecting their careers.
Ah RP, but there is #4.
4. Further fund Social Security, making it a true and viable safety net for our people. Fund Social Security by increasing taxes on the wealthy, by removing business loop holes and by de-funding the way over bloated and wasteful defense department. Also by reducing taxes on the working class so that they can spend more money invigorating our economy and/or saving/investing for retirement.
I’m curious Allen, do you know anything about the current and historical distribution of Federal taxes? How taxed are the wealthy today relative to say 1970? How about the middle class or the poor?
Based on your comments, I’m guessing your relatively ignorant of the facts.
Now on the substance of Michael’s post I have two thoughts.
1. The C-CPI affects the entire budget, not just SS. It’s largest effect is on bracket creep, meaning it’s a way of increasing tax receipts faster under the current rate table. This effect is far larger than the reduction in SS payments.
2. I’ll add a 5. to the list…stop paying SS benefits to (to use the President’s framing) “millionaires and billionaires.” Maybe we should start there before cutting benefits for others who need or raising taxes.
The people that truly NEED SS benefits are not worrying about bank fees or airlines costs. They have been frugal shoppers for most of their retirement and you simply can’t squeeze anymore blood from that turnip.
Food
Rent
Bills (energy, health)
That’s it. Reducing their benefits is like turning off their heat in the middle of winter.
SteveCh
Please talk about all taxes. Taxes include income taxes, payroll taxes and governmental fees.
Then one must address all taxes as a percentage of income. I’d rather be Buffett than his secretary.
http://www.theatlantic.com/politics/archive/2009/03/why-buffett-pays-less-than-his-secretary/1616/
Facts are SteveinCH, that you can retire at 58 in Germany and the social conditions of several European countries are much better than ours, especially for the retired working class. Fact is, American historical tax revenues are irrelevant, in my opinion, considering the awful state of our people’s standard of living, which retirement and healthcare directly factor into. Making any comparison between 1970 tax revenues and current tax revenues as a measure of working class prosperity is…preposterous at best, but a great tool for political rhetoric for an ill informed population.
One more point, fine do the voodoo CPI, but raise the cutoff point from $100K to at least $1M. That might help SSI.
Rudi,
Do you really want to know about Federal taxes or do you just want to repeat talking points?
Here’s some data from two liberal economists comparing income, payroll and imputed corporate taxes (that includes capital gains and the cost of corporate taxes imputed to shareholders).
P0-90 (aka the bottom 90%), 20.3% in 1970, 18.4% in 2004.
P90-95 (the next 5%), 21.4% (1970) to 24.5% (2004).
P95-99 (the next 4%), 24.8%(1970) to 27.0%(2004)
P99-99.5 (the next 0.5%), 32.2%(1970) to 29.7%(2005)
P99.5-99.9 (the next 0.4%), 38.7% to 31.1%.
Within the bottom 90%, let’s look for a moment at the P20-40 group (aka the lower middle class), effective Federal taxes on that group were 18.5% in 1970 and 9.4% in 2004.
So let’s examine our facts. Massive tax cuts for everyone except those people in the 90 to 99th percentiles of the income distribution. Effective tax rate cuts far larger at the bottom of the income distribution than the top.
Now what does that tell you, that “the rich” are undertaxed? Relative to what?
If you want to deal with data, let’s talk. If you want to spout off with no data, it seems rather a waste of time.
Allen,
Thanks for confirming your ignorance. Carry on.
I think that people that made $50,000 a year in 1970 and are making $175,000 now, but didn’t put away for retirement are irresponsible people. I do think that people making $17,000 a year in 1970 and $53,000 a year now, but have no retirement but social security, are not irresponsible. In fact, I find it far more irresponsible to lump the later together with the former as a political weapon against the poorer. Especially considering that the poorer have historically shouldered the much larger part of this nation’s defense. No, throwing how nation’s elderly into the garbage can is not an option. Cut the defense budget, end the wars, tax the be-Jesus out of the wealthy and end so called “business” tax incentives.
SteveinCH
Actually, you lose. Simply because you wish to weigh people down in politically biased interpretation of information. The “data” angle really don’t work because there is plenty of “data” on both sides of the “political” argument. You really have to rely on morality to approach this issue. Bogging down the argument in mountains of conflicting “data” just leads to partisan gridlock and retards the possibility of consensus rather than expedites it. The point is to find a way to consensus, not prevent it.
Ther PII (Personal Insulting Index)is going up again at TMV.
The funny thing is, we already have this concept in the normal computation of inflation. Search for “Inflation substitution” and you’ll find a lot of articles on it, or click here for just one.
I also remember how all sides were talking about having “everything on the table”, but Democrats are now trying to hold the SS umbrella (SS/Medicare/Medicaid/SSI) off the table, and Republicans are trying to hold both defense and tax increases off the table. That doesn’t leave a lot to work with.
That’s why they’re back to the usual games and deceptions, although those games have also been stretched to their limit.
Of course benefits and especially their growth are going to have to be, and have their costs, controlled. There’s no way we can pay for everything now, let alone what’s going to happen when the Baby Boomer cohort retires.
The trimming will have to be done on the larger benefit amounts, because those at the bottom have no more to give. Social Security is a vast middle-class entitlement, and many will be affected by the eventual necessary reduction in benefits, simply because of the benefit distribution. It’s the same problem as with the income tax: There aren’t enough rich to tax, and not enough rich beneficiaries to have their benefits, only, reduced. It’s that simple.
Correcting cost-of-living calculations and any adjustments for inflation (and why aren’t benefits reduced during deflation, incidentally?), is long overdue, as is raising the retirement age into the low seventies (at least for full retirement, if early retirement, which is another problem with Social Security currently, is retained), and perhaps indexing the retirement age and benefits for current recipients to longevity.
The changes will have to be not done to those at the bottom, again, but to those above, but “above” isn’t going to only consist of some mythical “rich,” but as much as half or more (much more) of beneficiaries.
Welcome to reality.
“The chained CPI does this by making an assumption, unprovable but probably correct, that consumers shop for cheaper products when times get tough. In doing so they spend less for similar goods so their personal inflation is less. This, in turn, means a smaller annual inflation benefit increase is appropriate.”
No doubt many consumers, who have jobs and do not receive social security benefits, probably do lower their expenses in times of need. And/or they may get a second job. However the amount of social security paid to seniors is already a pittance. And seniors have no other way to supplement their income unless they are in good health. Imagine being 75 with failing health and still struggling to get by. Would you want to work?
During the health care debate Republicans cried “Death Panels” but this is just as bad, forcing people at the end of their lives to work and provide no comfort to them. Doesn’t seem very compassionate.
This may be a bipartisan dem and rep plan, but I’m sure it’s driven by the Republicans’ desire to lower taxes and dismantle social security. This goes against core Democratic Party beliefs and values. Democrats giving in on this is better than the alternative- the privatization of social security.
ProfElwood
I think Social Security is already at rock bottom levels barley able to sustain people and how are we going to cut Medicare when Social Security checks are completely unable to provide for even the basic healthcare? People will go to the hospital anyway, it’s inevitable, or, lay dieing at home alone. You want hospitals to carry the burden of the elderly medial costs? Is that what you want?
Social Security would be solvent today had the conservatives not started robbing it’s coffers under Ronald Reagan for defense. Conservatives really need to admit this before they can become believable to progressives. What is it with conservatives trying to destroy the poor? This is not rhetoric, this is their voting record and indeed their argument today.
Conservatives simply do not address the elderly problem. They speak as if the problem does not exist. Maybe conservatives, so able to define when Life Begins, can define it as ending when it becomes financially unable to sustain itself. I just don’t understand how they can turn their backs on our elderly citizens. It’s so irresponsible. Even totalitarian!
For those who want to know more — something like this, Steve in Chicago probably already knows about, but for the rest of you:
http://www.ssa.gov/policy/docs/ssb/v58n2/v58n2p21.pdf
Note particularly a concept and term that is especially useful both to understand the current benefit structure, and any reformed structure, namely the replacement rate, the ratio of Social Security benefits to former, i.e., pre-retirement, income.
A continuous graph or a suitably precise graph (and table, but the graph is more useful for visualization) using percentiles of the replacement rate for each percentile would be an improvement. Any formula for benefit reforms (and this is true, as I’ve said in the past, also for income taxation!) could use percentiles (or some other more coarse but still suitable fraction, though percentiles are ideal) to calculate benefits (and income tax liability, etc.).
SteveCH where’s the link, I.m stupid that way
Oh Rudi, it’s right here. You’ll note the numbers I gave exclude the estate tax. If you want to have a debate about why, I’m happy to do so.
http://elsa.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf
Allen,
Your perspective on data would be interesting if you actually had some. Since you don’t, it’s just whining.
Ignorance is sad. Willful ignorance is a bit annoying.
Take care now.
Social Security would not be solvent today if the trust funds had been left alone.* The Baby Boomer cohort’s retirement makes that obviously incorrect, as the mythical “trust fund’s” exhaustion date statements day after day make so clear. The trust fund is no such thing now, but a mass of additional debt that will have to be paid somehow to pay benefits in full — just as more money has to be found currently, as Social Security began running deficits earlier than previously expected (2016) with the slump and made worse by ObamaCo’s reduction of FICA taxes (which he irresponsibly wants to continue, not end, as part of a budget deal — a responsible budget deal would raise FICA taxes and perhaps include changes or “reforms” such as raising or ending the “cap”).
And for true solvency, meeting all future entitlement (Social Security and Medicare) obligations (not limited to the arbitrary 75-year period often used), would require us to raise FICA taxes to 25 per cent. That doesn’t account for changes needed to cover the expenditures for Medicare out of general funds nowadays (and I suspect some Dems would want to transfer more future obligations from FICA taxes to general revenues mainly raised from income taxes, perhaps with a wealth tax added someday).
Year after year the Trustees tell us what would be needed to make the entitlements solvent through 75 years in the future (they are deficient in not requiring an indefinite time horizon).
For Social Security the Trustees say this, this year — deficit identification is made bold text. That’s the adjustment that would have to be made now to correct things (only) for 75 years.
For Medicare, incidentally, the Trustees say this — and also in bold text is an important detail that people need to keep in mind.
The entitlements have never been solvent. They are pay-as-you-go programs that fail because of future demographics in addition to the escalation of benefits after World War II that Washington politicians engaged in to spend more lavishly and buy more votes, as well as help stoke unrealistic retiring-ever-earlier expectations.
Welcome to reality.
(Food for thought)
* This is also, obviously(!), the argument against creating any kind of “reserves” or “rainy-day funds” for the federal and for many state governments, to build funds for future large expenditures, such as not only with Baby Boomer entitlement demographics but for the business or economic cycles. Tax more and lay money aside in booms, use that money to assist people and perhaps be “stimulative” (must be in quotes after what the Dems did in 2009-2010 — for which they were punished electorally) during busts. Any such funds will likely be mistreated even more badly than “general funds” — they will be raised, we can count on that.
The same applies to “sinking funds” by governments intended to pay down and eventually eliminate government debt. (And does anybody seriously believe we could trust Washington with such a fund to pay off our federal debt when we’re amassing more of it?)
P.S. In the excerpts from the latest Trustees Summary report I provided in my previous posting, note the bolded current-value deficit calculations the Trustees did for a 75-year time horizon for OASDI and for HI, the FICA tax-funded parts of Social Security and Medicare. Notice that the values are a larger fraction of tax receipts than for program outlays. Yes, benefits exceed taxes — these programs aren’t solvent but are in fact unsustainable in their current form. Their reform is inevitable. It is inescapable.
We cannot expect simply to raise taxes sufficiently to pay all benefit obligations now and in the future. Only fools or the childish believe that. (In the past reports, before ObamaCo took office, the effect of program deficits on federal finances, and the unprecedented size of future federal entitlement expenditures as a fraction of GDP compared to historical experience were stated to help inform the public of the seriousness of entitlement problems. These warnings have been removed by ObamaCo.)
Steve in CH[I] wrote:
(Especially when the ignorance has been corrected so many times, if only some (many) would choose no longer to be so ignorant!)
There’s more related to it, though.
There is the trying to foster or perpetuate ignorance, which Democrats and a number of liberal activists continue to do with the entitlements. (as well as with so many other things!)
Back in 2005, they outright lied (including Pelosi on CNN, which I heard myself) about the state of Social Security, denying there was anything wrong or that it should ever be changed. (“It will be more valuable later if we leave it alone now.” — Maurice Hinchey)
I was really disappointed and disgusted to notice the reaction to the very tame Bowles-Simpson recommendations: Pelosi called them “unacceptable,” Harry Reid denied any problems with Social Security and said we should leave it alone for at least thirty years, and Obama himself insisted we not reform it substantially at all.
It’s more of the same from the Ignorance Industry Usual Suspects.
Keep the votes purchased from the suckers (as Obama’s campaign style so obviously and dramatically illustrates), the cheap, easily bought votes and voters, the believers in magic.
[scowl]
SteveinCH says
What’s annoying is conservative intransigence in the face of what cuts in Social Security and healthcare will do to elderly Americans. Inhumane treatment of American citizens is not a viable budgetary alternative.
Politically manipulated “data” will NOT work as an arguing point. Calling somebody “ignorant” because they do not waste time collecting and arguing about politically corrupted “data” is just another long dead political tactic.
Data only verifies past moral actions. At this point conservatives have no moral standing left to believe in.
Allen,
You’re consistent if nothing else. Buzz words and insults don’t do much but if it’s all you have, feel free to bring it on.
And the fact that you are accusing the left’s two favorite economists on income distribution of politically manipulated data just shows you’re impervious to facts.
Some people are like that…
SteveinCH says
You are making the insults not me, but then again thats conservative tactic. What, would anyone expect anything different? I’m surprised that you haven’t screamed out “You Lie” yet.
Allen,
Ignorance isn’t an insult. It’s a state of being ; )
SteveinCH
I’m sorry, but I don’t live in your state.
While you preach morality, Allen, let me serve you a dish of reality.
You…meaning all liberals…….cannot get the job done, otherwise, it would have been done already.
So ,if you are incapable of getting things done without conservatives, let me suggest you had better be less preachy and more accommodating in your negotiations, otherwise you will be even less influential tomorrow than you are today.
All liberals, all conservatives, all inclusive broad brush rhetoric tinged with personal insults.
Come on, these guys are all on stage and the media further distorts with biased “reporting”.
(So what else is new?)
Allen,
Yes I know, I try to avoid the state of ignorance. You, well….
You refuse to present facts simply restating your unfounded opinions. When presented with facts, you assert facts are irrelevant. You impeach the source of my facts without knowing anything about it, assuming that any facts that contradict your point of view must be false or spun. You insult anyone who differs with your uninformed world view as if they, rather than you, have the issue.
Those are the hallmarks of someone doomed to stay ignorant despite being offered the opportunity to change states. It’s too bad really but all too common these days.
Good luck finding the choir : )
casualobserver
What? You conservatives are just going to place the burden entirely on the poor and working classes. Unfortunately the nation’s remaining wealth is in the hands of the corporations, big banks, and, Wall Street Investment firms, not the people. They have gleaned away the populations wealth for decades with their businesses. Business has failed America because it has not become self sustaining enough, nor self regenerating enough to meet our people’s needs.
Now it’s time these business interests pay back what they have taken in excess, from our people!
SteveinCH
So then, your proposal is…what?
Lets hear your description of the Republican “BBA” demand please. Break even don’t cut it, mind you. Actual debt must be reduced in order for interest payments to be reduced, not just eliminate the deficit and break even. If we do not reduce interest payments then there is no future for our population and you are not going to squeeze anymore out of the poor and precious little for the working classes. So what is the Republican fiscal Conservative proposal??
@ Allen
All you’re going to get from the ‘right side of the room’ here are examples of how the right wingers talk (insults) and think (full time attack mode).
They’re not worth your time as trying to engage them in any ‘grown up’ conversation always tend to go the way this thread has gone. Their selfish, amoral (immoral?) attitudes prohibit them from hearing anything but what the voices in their heads tell them.
The good news… They’re perfect, consistent examples (comic book caricatures actually) of what happens when selfishness, greed and a total disregard of others is taken to its final extreme.
And, they’re great examples for teaching your kids who and how not to be.
Lots of projection on your part, Steve[ ]K.
[sigh] We continue to give you more chances, nevertheless.
You remain invited to do better than that.
* * *
Allen, you’re going to have to do better yourself in the thinking department. The entitlements are unsustainable, spending, our government problem, is going to have to be curtailed, and future reform with federal, state, and local government will include the necessary setting of priorities and ending what can’t or shouldn’t be done any more. With our federal entitlements, it will include reform that will be ill received by many overgrown kids, but that’s too bad. The future is also going to be tough on future taxpayers and the pain is going to have to be shared (to use nomenclature correctly here, rather than in the appeal-to-idiots manner Obama uses when in frequent campaign mode). Start facing the facts.
* * *
Steve (in Chicago), there’s something else related to Social Security and a proposed reform I have thought of (single minimal benefit for everybody) the current program’s numbers of which make things look uglier in the future than before, and which boost the likelihood of means testing for this (and Medicare). More in a while later tonight on this thread.
SteveCH
Funny, but your links first few paragraphs don’t prove your point.
@Allen
1. I didn’t offer a proposal, so criticizing it seems a bit premature. I was simply pointing out that substitution is already in the formula. The BLS/CPI data, like many other official statistics, is already heavily manipulated.
2. Medicare, in particular, is not at “rock bottom”. It may not be paying for 100% of the senior’s expenses, but the payout schedule for doctors needs some serious revision. To learn more, look up the RBRVS and the AMA’s RUC, or check out Replace the RUC.
3. Johnson, not Reagan, started the unified budget, which put the Social Security trust fund on the chopping block.
Funny Rudi, but you should look at the data. The conclusions are driven by the estate tax data which isn’t relevant.
As for quoting a marginal tax rate point, even the authors know it’s not relevant but cherry pick a paragraph as opposed to look at the table. That’s your right.
The data proves my point : )
SteveK
I’ve always been impressed by people whom make the Social Darwinist argument, but refuse to apply it to themselves or to their own, but rather only to others. It is this exact imperialism that we rebelled against in 1776. Equality is the very reason for self government.
How objective self introspection completely alludes these people is beyond me.
LOL SteveCH I guess you never read formal academic reports. The intro and conclusion spell out what the data and logic show the reader. You are the one cherry picking some data to come to your opinion, which is completely opposite of the Berkeley paper.
Steve in Chicago: Here’s more information that shows that means testing for Social Security is probably inevitable. (So much for my idea of an equal, adequate payment to every beneficiary. Read on.)
I’ve said that there will be some pressure to keep entitlements fully universal, because going to a poor-oriented program will introduce stigmata (mainly by being poor-only which the major stigma, taxpayers don’t benefit from the programs, but pay for them anyway, and other unpleasantries). Ideally we would keep the program universal but go to the same minimum payment for all, which might even be raised to help those at the bottom. (Those with political learning know that this means for those beneficiaries — not all of society — a “guaranteed minimum income,” or the later term “basic income guarantee,” for those beneficiaries. While it’s fuzzy if Social Security eventually was meant to be a guaranteed minimum income for all, we have heard from the late Ball that Medicare was intended eventually to be extended to everybody.)
The problem with a nice guaranteed minimum for everybody is the cost, and here is the data (numbers) that show why that’s so.
http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/
I’ve checked and yes, the “average” is the arithmetic mean benefit that is the total payout of the program divided by the total number of beneficiaries (old age plus disability plus survivors).
Look at the figure: it’s $1,077.60 per month. If we took all the cost (payout) of Social Security and distributed it equally to all beneficiaries, that’s what each beneficiary would get.
Is that an adequate amount for someone depending on Social Security as their only means of income in retirement or other circumstances? I would say it is not. (Can all monthly expenses be met and can an excess easily be had to save for future larger expenses like auto repairs and eventual auto replacement?)
And to raise this average so everybody would get an adequate amount (at least up to the federal poverty level for an individual, and probably more because it’s commonly agreed by many that the poverty level is too low to be marginally adequate) would be cost-prohibitive. We’re looking at at least doubling the amount and thus the costs of Social Security.
And, that’s before the retirement of the Baby Boomers.
The present costs of Social Security (the Godzilla of the federal government and budget in competition with Medicare) are simply frightening. Many are aware of sticker-shock “big-ticket” military weapons systems, and many liberals want to gut the military because among other reasons they want to shift the money to being spent on other things. Dorcas Hardy in the early 1990s described Social Security in terms of various weapons systems per minute, hour, or day regarding its costs, and it would be revealing to do the equivalent of this now.
The sheer size of the program now, and the impossibility of raising benefits to adequate (much less to liberal-inflated “dignified” levels) probably makes means testing inevitable. As with so much else in government that will have to be rationalized, priorities with the entitlements will have to be set and those who aren’t high enough in priority will have to not be beneficiaries, or get their benefits sharply, greatly reduced. The numbers show it.
That’s especially when you consider future retiree numbers.
Oh, and it’s an insoluble problem to guarantee $2,000-3,000 monthly to every Social Security recipient, and one can see at once the impossibility of a guaranteed minimum income for all.
Looks like we get means testing or a universal program
Cheers!
P.S. Never mind conversion from pay-as-you-go to full funding. Nobody’s competent or willing in Washington to do this, and there is insane behavior about entitlements resisting any changes at all. I thought the mid-2000s were the last time and a good time to convert Social Security (and Medicare) to fully funded programs, but of course the insane anti-change lib-Dem crowd weren’t even capable of thinking about this. (I doubt many Republicans, either.)
Again, the stats that count are here: (note “average” benefit)
http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/
Rudi,
I guess you’re not interested in the ridiculous assessment they did of the estate tax which account for all of the changes you describe.
I’m aware my opinion is the opposite of the authors. I’m aware why and I’m willing to argue the point.
Guess you aren’t.
G’night.
Oh… OK… Now it seems that the financial genus wants to make this about “the estate tax.”
Next week, after they’ve (SteveinCH isn’t all alone in his asininity) lost all their childish, selfish (or corporate purchased) talking points, they’re certain to come back with “they’d never said what they said.”
Sadly this is as expected.