Mr. President: Tweak This!

10/10/2012 10:40 am ET | Updated Dec 10, 2012
  • C.A. Rotwang Whisperer of political economy on Capitol Hill

It would not be right to call it a sell-out: the cuts that Democrats would make to Social Security benefits. They have been signaling it for some time. In the recent presidential debate, the president reiterated his determination to reduce retirement, survivor, and disability benefits for millions of Americans. This admission came in the form of an acknowledgement that his position did not differ materially from that of Mitt Romney. This alleged agreement is that the system is not in fundamental difficulty, but it needs to be "tweaked." Whether Romney's side of this can be believed I will leave to others. My concern here is the view of the more likely winner of the election, and the one I will be gritting my teeth to vote for, Rockin' Barack Obama.

It is a scandal of modern American politics that a vital program presently needing no change at all, as far as solvency goes, is widely believed to be on a path to bankruptcy. The program's unappreciated health can be verified by reference to the most recent annual report of the Social Security Trustees. If you trouble to look at Table VI.F4 you can see the cash shortfall in the program over the next 75 years is never more than 1.6 percent of GDP. There is no program deficit until 2033. How much is 1.6 percent of GDP?

Of course the U.S. GDP is a big number. But so is the tax capacity of the largest economy in the world. At the end of the 1990s, Federal tax revenue was nearly 21 percent of GDP. Today it is less than 16 percent. So making up just a portion of that decrease over 25 years, from an economic standpoint, is trivial. In terms of 2012 GDP, one percent is $156 billion. The defense budget has grown more than that over the past five years. Can it be that the Federal budget could not handle that adjustment over the next twenty-five years?

Politically of course any percent of GDP in added revenues is as humongous as Big Bird, because we are afflicted with a population that, egged on by an army of flaming liars, thinks public television absorbs half the Federal budget and Obama is a secret Muslim. And oh, a lot of liberals who think recovering 1.6 percent of GDP 25 years from now is so daunting we need to start reducing benefits pronto.

Those who follow this debate know that the Republicans resort to euphemisms to conceal their desire to dismantle the program. They discovered their original terminology -- "privatization" -- to be grossly unappealing, so they have pivoted to "personalization." But our interest here is the Democrats. Fair and balanced! They have their own weasel wording. We are told that Democrats are dead set against "slashing benefits" and the aforementioned privatization. They want to "strengthen the program." But that still leaves "tweaks."

There should be no doubt about the likely tweaks that would be considered. There are not many, and they have been chewed over for years, nay, decades. They are:

1) changing the price indexing applied to benefit determination

2) raising the retirement age

3) "means testing" benefits

It is possible that a "fix" to the program would include revenue increases as well -- increases in the payroll tax, perhaps the extent to which benefits themselves would fall under the individual income tax. The older one is, the less one would be affected by the revenue increases, relative to the benefit cuts. The younger one is, the more one gets the double-whammy of tax increases sooner, benefit cuts later. Remember, we're doing this for the children! Kids, you pay more, get less, and the program is "stronger" and more "modern."

So how big are these so-called "tweaks"? Let's take them one at a time, keeping in mind that the average monthly retirement benefit under Social Security is $1,230, and most people have little or no other income in retirement. For single persons who do not own homes, benefits are 92 percent of net worth. Hello old people living alone in rental housing, we need you to tighten your belts!

1. Benefits are determined by applying cost-of-living changes to a worker's wages. Explaining exactly how here is boring and unnecessary. All you have to know is that a small change in a factor applied over many years adds up to a big change at the end. Imagine you received a gift of $1,000 at age 21, and you bought some kind of asset that accumulated interest indefinitely. If you made three percent interest after taxes, after 30 years you have $2,427. But suppose it is only two and a half percent? Doesn't sound like much, right? It's only half a percent. After 30 years you have $2,098, a fourteen percent reduction. Imagine living frugally, then needing another fourteen percent of frugal.

Proposals for reduced cost-of-living adjustments, sometimes referred to as a "diet COLA" by people whose own well-being will be unaffected, will be accompanied by arcane commentary to the effect that the factors currently in use are overstated. This commentary will be provided by economists cherry-picked for their advocacy of this view, and we will be told that "all economists" agree, which will of course be a lie. (See Dean Baker's Getting Prices Right: The Debate over the Accuracy of the Consumer Price Index.) And by the way, none of this discourse confronts the likelihood that prices of the things purchased by the elderly do not grow at the same rate as those for the population as a whole.

2. The second favored tweak is an increase in the retirement age. This reform is designed by people who work sitting on their ass. Now your humble correspondent plans to work until age 70, perhaps well over possible retirement age increases. But I'm sitting on my ass too. If I had to pick up Mitt Romney's garbage, I might look forward to an earlier retirement. In fact, I might positively require it. Distinguishing between me and the sanitation worker in practice would entail a complex and error-ridden bureaucratic process, and the current administration of Social Security and Medicare already leaves much to be desired. Try calling them some time. It's fun!

An increase in the retirement age might not look like much to someone just starting out, but it will look quite different to people in their 50's who do not find joy in their daily work. Moreover, a later retirement means less benefits. After all, retiring later doesn't mean you get to die later. A higher retirement age is a benefit cut. How big a cut, you will ask. But first, there is an additional malignant feature of this device: It has a bigger negative impact, the lower one's income. The reason is that those with lower income have shorter life spans on average, so their years of retirement benefits are reduced by a higher proportion than those with higher income. So it is unnecessary and unfair to boot.

It has been estimated that for the lowest 20 percent of couples, their wealth is reduced by 18 percent. The highest comparable income group has a reduction of eight percent. Any higher taxes on the rich or battery plants in Michigan will be cold comfort to those in benighted circumstances absorbing a retirement age tweak.

3. The third celebrated tweak is described as means-testing, which means reducing benefits for those with higher income. First we get regaled with tales of millionaires receiving needless benefits. The problem is that the definition of "rich" undergoes a dramatic transformation, between this sort of propaganda and actual proposals. The reason is that eliminating benefits of the really rich has a negligible effect on total program expenses. So "on Social Security rich" is going to be much less than "rich in the eyes of any fool."

We might note that Social Security is already means-tested -- benefits for those with higher incomes are taxed. If we were absolutely compelled to means-test, the income tax would be the logical tool, since it takes into account family size, other income, dependents, etc. Done on the Social Security side, however, means-testing benefits (= taxing benefits more) is a crude method of economizing. You all can guess why the income tax will not be used for means-testing. Don't make me do all the work here, people.

A long-standing objection to means-testing is political. By increasing the extent of means-testing, the program's universality is diminished and its political support weakened. Universal in this context means there is some systematic relationship between what you pay and what you get, hence the "insurance" part of the general designation "social insurance." Means-testing weakens the link between contributions and benefits. It increases the number of higher income persons who would just as soon have no program at all, since their accumulated foregone payroll taxes would exceed their benefits under the program. The political fallout would magnify the nascent over/under 55 conflict noted previously.

The bottom line is that for the majority of retirees with little or no savings, a benefit tweak IS a slash in benefits.

One political dodge in all this has been the assurances that age 55 will be the magical cut-off. Program changes will not affect benefits for those within sight of retirement. This a) is not necessarily true, b) may not hold up, and c) is cold comfort to a 54-year-old. In the first case, we have been told in the past that existing benefits are provided by an inaccurate price-indexing process, so literal benefit cuts have been proposed under the guise of making cost-of-living adjustments more "accurate." In the second case, once the benefits of those under 55 have been attacked successfully, what reservoir of sympathy for retirees on the part of those workers will remain when those old dirty bastards are told, surprise, your benefits are due for a tweak as well?

Much has been made of Republicans' flagrant disregard of truth. And Lord knows they deserve it. But what of their counterparts? I suggest that if Democrats are honest, they would a) acknowledge their own exaggerations of the program's difficulties, and b) spell out the impact of their purported "tweaks." After all, if Romney ought to spell out how his magical tax proposal reduces rates and recoups all lost revenue, shouldn't Democrats do the same with respect to their Social Security reform nostrums?

In the matter of Social Security, Barack Obama and the Democrats have some 'splainin to do. The return of Occupy! cannot be too soon.