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Super Committee Cuts to Social Security to Divert From Real Issues

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Cross-posted from New Deal 2.0.

The Congressional Super Committee to cut the budget deficit, due to report soon, has let it be known that it will cut Social Security benefits. Let me be short and sour about this. It is a public relations stunt. They basically say so. All this is about is showing the world America is serious about cutting its long-term deficit. The nation has the guts to do what it takes. It is no bleeding heart country. It is willing to beat up on the elderly.

Other allegedly serious Democratic economists from fancy institutions have made the same argument. The reason is simple. You seemingly can make modest adjustments to Social Security to dent or even eliminate the projected longer-run shortfall. You can't do that with Medicare.

In exchange for these Social Security cuts, the Democrats expect the Republicans to consider tax increases. They are probably going to be rolled again by the intransigent Republicans, who believe avoiding all taxes on the rich is the sure path to infinite reelectability.

So let's be clear. The Social Security Administration projects that benefits will rise by one percent of GDP from five percent to six percent over the next 20 years or so and then stabilize or even fall a bit due to the rising elderly population. One percent. That's what all this is about.

This increase can be covered completely by raising payroll taxes by 6.2 to 7.2 percent for workers and employers. All of it can be covered by eliminating the cap on Social Security taxes, now about $109,000 a year. Even though it's not practical, raising the cap to the point where it covers 90 percent of wages earned -- the original level -- would go a long way to paying for benefits.

But let me remind us all: There is plenty of room to raise other taxes. America is almost the lowest taxed rich nation in the world. But it doesn't have the highest standard of living for its average citizens -- not compared to free education in Europe, much cheaper or free health care, and so on.

Let me also remind us that Social Security is not very generous. The average payment is $14,000 a year. It is getting less generous. It used to replace 55 percent of retirement income, but benefits were reduced in the 1980s. It now covers on average 41 percent of retirement income. In 2031, it will cover 32 percent of retirement income.

We have already reduced the program's generosity. Yet, Social Security provides nearly all income for one quarter of the elderly and more than half the income for more than half of the elderly.

The Super Committee will say it simply wants to make the inflation calculation more accurate. It will reduce benefits. But government research suggests elderly costs rise faster in price than the traditional measures of inflation.

The Super Committee is likely to do some real axing, if it gets its way, on Medicare. But it, too, is not a generous program. The typical beneficiary earns $23,000 a year, yet co-pays and deductibles are high. One analysis by the CBO showed that the typical employer plan provides 88 percent of beneficiary's needs. According to an analysis by the Congressional Research Service, Medicare provides only 76 percent.

One last important point. Big cuts in Medicare and Medicaid will mean that health care expenditures will go up because Americans will get their insurance in the private market or on the public dole somehow. It will not cut overall medical costs, which are ridiculously high in America, as we know. Paul Ryan's absurd Medicare plan, according to the CBO, would raise American spending dramatically overall. In sum, cutting Medicare sharply will either mean more health care expenditures for the nation as a whole or a large chunk of the elderly going without adequate coverage altogether.

What will drive future budget deficits is Medicare and Medicaid, not Social Security, and for the umpteenth time, the reason is that overall health costs are expected to rise quickly. This means we have to reform our uniquely inefficient healthcare system. Congress is, as usual, diverting us from the real issues. No wonder Americans like Occupy Wall Street.

A final word on taxes. The top 1 percent pay federal income taxes at a rate of 23 percent. If we raised it to their rate only ten years ago, we'd collect about $100 billion a year. If we reversed the Bush tax cuts on those who make $250,000 a year, we'd raise about $830 billion over ten years. If we reversed all the tax cuts, including on the middle class, which I'd favor, we'd raise about $3.5 trillion over ten years.

We have plenty of taxing capacity to take care of our needs. We simply refuse to act as a modern nation, driven by myths that we can somehow return to the simplicity of colonial America. But even colonial America was more complex than what today's Republicans imagine it was.