Social Security: The Cruelest Cut of All

Social Security: The Cruelest Cut of All

As most people know, President Obama’s budget would, in the words of Bernie Sanders, a Senate Budget Committee member and chairman of the Committee on Veterans’ Affairs, “make significant cuts in Social Security and lower benefits for disabled veterans.”

What most people do not know is the degree to which this is true. Bernie tells us: “Under the budget proposal, a sixty-five-year-old retiree would lose more than $650 a year in Social Security by their seventy-fifth birthday.” Since most retired seniors depend on Social Security for more than half their total income, this is a cruel proposal. The cuts are worse for veterans, as Sanders added: “A disabled veteran who started receiving benefits at thirty would have their benefits cut by $1,425 a year at age forty-five and $3,231 at age sixty-five.”

The argument for making a change in the inflation adjustment is that many people respond to increases in the price of some goods by switching to less expensive substitutes. Obama’s budget proposes using a “chained CPI” (consumer price index) to adjust for such substitutions.

While there is no official “cost-of-living” index that specifically measures the impact of inflation on older persons, there is an experimental measure (CPI-E) based on those sixty-two and over. It shows that in the years 2001 to 2013 there was, on average, a greater rise in this index than in the other cost of living indexes, which apply to urban and clerical workers, even if in recent years the CPI-E’s growth has slowed. Had this index been in effect many of those who retired in 2001 would be receiving $56 more in payments yearly, not $869 less, the amount a chained CPI would have produced.

The higher adjustment to inflation for the elderly appears to be due to a higher use of medical goods and services, the prices of which have been increasing at a faster rate than most other products. Moreover, taxes on homes—which older persons own in greater numbers—have also grown at faster rates. Nonetheless, the CPI-E, the estimated growth of prices for the elderly, is, according to the Bureau of Labor Standards, still experimental and should be used with care. (For example, many over sixty-two are not retired.) However, there is no reason found in the data to decrease payments made to recipients of Social Security, since the evidence appears to show that their inflation rate is greater than the rate for younger people.

But there are other reasons why one should oppose cuts in Social Security. Broadly speaking, negative changes, such as cuts, open the door to undermining Social Security in general, and who knows how wide the opening will be.

We saw this when Obama’s predecessor wanted to give individuals the opportunity to invest part of their Social Security where they saw fit. Opponents believed that this would lead untutored investors to jeopardize their benefits, and the proposal never made it to the floor. But many also feared this was George W. Bush’s first step toward attempting the privatization, and eventual abolition, of Social Security, something conservatives have long wanted.

Broadly speaking, negative changes, such as cuts, open the door to undermining Social Security in general, and who knows how wide the opening will be.

The opening provided by Obama’s budget makes it easier to argue that those earning over a certain amount, say $500,000, should receive less than what they receive now. (In fact, Social Security already returns to the rich a considerably lower percentage of their income than it does to those with middle incomes and the poor—in the range of 25 percent for the well-to-do, compared to nearly 50 percent for the poorest.) One might naively ask what is wrong with legislation that lowers benefits for the rich. The answer is that the payments that currently exist have long been incorporated into the system. Lowering the amounts going to the wealthy could be used as a first step to further changes, eventually turning the Social Security system into a welfare system. And turning Social Security into a welfare system is the route to getting rid of it altogether.

The Social Security system is not responsible for our deficit. It has brought in much more money than it has paid out. Trillions of dollars of Social Security funds are invested in U.S. government bonds. Paying that back to recipients, as the numbers of retirees grow, is not spending that creates a deficit. It is simply honoring debts made in the past to the Social Security fund, although like other debts it must ultimately be paid by borrowing if taxes fall short.

In the 2030s, if nothing is done, shortages in the fund will lead recipients of Social Security to receive only 75 percent of what they are entitled to. The basic choices, therefore, are to do nothing—a nightmare—and simply pay the retired approximately 75 percent of what existing legislation calls for, since the money for the full amount will not exist; to increase the percentage taxed—as done in the 1980s with the approval of Ronald Reagan—to about 7 percent from the existing 6.2 percent, paid both by employees and employers; or (what I prefer) to increase the income subject to the Social Security tax, which at present is slightly over $110,000. Increase it to what? Some argue for $500,000; others suggest somewhat higher or somewhat lower amounts. Why not follow the example of Medicare, whose tax applies to all earned income? It’s not that the rich will not receive more as a result. They will. But much of the increased revenue will go into the Social Security fund and will enable it to pay all of the legislated benefits, not 75 percent of them.

Social Security prevents huge numbers from living in utter poverty. It is one of the greatest accomplishments, perhaps the greatest accomplishment, of the New Deal. It must not be undermined, and that is why it is important that liberal Democrats do their best to preserve it as it is rather than accept Obama’s proposal.

David Mermelstein is emeritus professor of economics at what is now called the Polytechnic Institute of NYU. He has edited numerous books, including Economics: Mainstream Readings and Radical Critiques and The Economic Crisis Reader, and has written for journals such as the American Economic Review and for the opinion section of the Los Angeles Times.