THE BLOG
10/30/2013 03:23 pm ET Updated Jan 23, 2014

As Budget Conference Begins, 1.5 Percent 2014 Social Security COLA Underscores Need to Address Retirement Security Crisis

Today Paul Ryan (R-Wis.) and Patty Murray (D-Wash.), the chairs of the House and Senate Budget committees, kicked off the first session of the conference committee charged with hammering out a federal budget deal for Fiscal Year 2014. The Social Security Administration also announced today the size of the 2014 cost of living adjustment (COLA) for Social Security beneficiaries -- it will be 1.5 percent, the fourth smallest since automatic COLAs were introduced in 1975.

These two events point to two separate challenges facing the country: first, reaching agreement on the public policy challenges at stake in the federal budget; second, tackling our retirement security crisis. Some in Congress, such as Rep. Paul Ryan, conflate the two, and misdiagnose both in the process. But if we misdiagnose these challenges, we will fail to devise appropriate solutions.

Some claim that the challenge faced by the Budget Committee is how to further cut federal spending. Yet deficits are already declining rapidly: Under President Obama, the deficit has shrunk from 11.1 percent of GDP in 2009 to 7.4 percent in 2012, and is projected to drop further in the coming years. Yet, as Dean Baker noted at a conference of retirement security experts today on Capitol Hill, at a time when our nation is afflicted with levels of social inequality not seen since the 1920s, the challenge faced by the Budget Conference Committee should be how to counterbalance that inequality in our economy and society by crafting policies that will foster a more equitable distribution of opportunity and income. American workers need an education and training system that equips them to succeed in internationally competitive labor markets. And we must put an end to the austerity policies -- the sequester's arbitrary, across-the-board budget cuts -- that are throttling job creation as the country struggles to escape the aftermath of the Great Recession. The challenge for the Budget Conference Committee is not how to enact further austerity, but how to foster economic growth that redounds to the benefit of all Americans.

The retirement income crisis poses a parallel, but distinct challenge. It has nothing to do with the annual appropriations process that Murray and Ryan will be grappling with in Budget Conference Committee in the coming weeks, as Social Security is walled off from the federal budget. FDR designed the program with dedicated funding through the payroll tax precisely so that American's retirement security would not become embroiled in partisan annual budget battles. Rather, the policy challenge here is how to address the fact that between half and two-thirds of today's workers are projected to experience downward social mobility in retirement, nearly twice as many as a generation ago.

Just as with the budget, the consensus among beltway insiders such as Paul Ryan is that the primary retirement policy challenge facing America is how to cut Social Security spending. Yet our payroll taxes are projected to fall short of our scheduled benefits by only 15 percent over the next 75 years, a manageable sum that could be mostly met by scrapping the cap (currently $113,700) on incomes subject to the payroll tax, so that millionaires pay the same payroll tax rate on their wage income as average Americans. A range of specific, actuarially sound plans were presented at the retirement security conference today on the Hill, all of which would eliminate the 75-year shortfall without cutting benefits.

But the real policy challenge here is not eliminating the Social Security shortfall, but reducing the retirement security shortfall projected for today's workers' when they retire. Right now, each successive generation of retirees is projected to be worse off than its predecessor -- substantially worse off. Whereas today's War Babies (age 68-77) are able to replace 99 percent of their previous earnings in retirement, Early Boomers (58-67) are projected to be able to replace only 82 percent, Late Boomers (48-57) 59 percent, and Gen-Xers only 50 percent of their previous earnings. Retirement experts estimate that households need to replace between 75 and 95 percent of their pre-retirement earnings (lower earners need to replace more than higher earners).

So there is a lot of ground to make up, and not much time to do so. Yet at the moment, benefits are being cut, not increased. Reforms enacted in 1983 and 1993 are still phasing in. The retirement age is steadily rising to 67, which is a de facto benefit cut of circa 13 percent cut at any age one retires. And taxes on benefits were introduced at low income thresholds that are not inflation adjusted, so they take an ever greater bite out of benefits over time. Taken together, as Virginia Reno of the National Academy of Social Insurance has shown, by 2050 benefits will be about 24 percent lower than what they would have been without these reforms.

Given this context, it is critical that at the very least, Social Security's cost of living adjustment protect benefits from erosion from inflation. Yet the current COLA fails to do so. It understates inflation experienced by the elderly. The Bureau of Labor Statistics tracks another measure geared to specifically measure their living costs, called the CPI-E, or experimental Consumer Price Index for the Elderly. It tracks the cost of the basket of goods seniors actually consume, taking into account, among other things, the higher health care costs seniors face. It rises about 0.2 percentage points more per year on average than the current CPI, thereby better protecting seniors' benefits from erosion from inflation.

The low COLA announced today is a reminder that it is time to adopt the CPI-E, to fully protect working Americans' retirement benefits from erosion from inflation. Many proposals announced at today's conference proposed to do so, including that of Sen. Tom Harkin (D-IA).

So as the Budget Conference Committee begins its work, and another historically low Social Security COLA is announced for 2014, our country faces two distinct challenges in budget and retirement security policy. The Budget Committee must deal with a range of challenges relating to restoring equitable growth and opportunity. In addressing retirement security, policymakers must find a way to make up the ever-increasing shortfall in retirement income projected for today's workers who will retire in the coming decades.

As Yale University social insurance expert Theodore Marmor argued at the conference today, and elaborates in-depth in his new book, if we define the retirement security crisis as the Social Security shortfall, we utterly misdiagnose it. And as we all know, misdiagnoses lead to crackpot cures. Addressing the retirement security crisis by cutting Social Security benefits would be a crackpot cure. The real retirement crisis is the retirement security shortfall, and the best way to solve it is to expand Social Security.

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