Obama wants to cut Social Security

By Ben Strubel

Along with most Republicans, many Democrats, and Wall Street, President Obama wants to cut Social Security. Here is what you need to know.

What Cuts Are Being Proposed?

Obama is proposing, along with the support of Republicans and many Democrats, to change how annual increases in Social Security benefits are calculated. Obama wants to switch to a different formula, called Chained CPI. This switch would result in a benefit cut of $230 billion dollars over 10 years. All this is being done under the guise of “strengthening” the program and “securing it for future generations”.  (See here, here, here, here and here)

Right now, annual increases in Social Security benefits are calculated using changes in CPI (Consumer Price Index) which measures the price increases in various goods and services. Chained CPI is a twist on regular CPI in that it assumes that when the price of one good goes up people will substitute a cheaper good. For instance, if the price of steak goes up people will switch to chicken. While this makes sense for some things, it doesn’t for others. For instance, if the price of natural gas goes up you can’t just change the heating system you have. If the prices of essential prescription drugs go, up you can’t just substitute something different.

So how much would Social Security payments change under Chained CPI? At first, it doesn’t seem like a lot. Using last year’s data, the change would amount to only $3 less for every $1,000 received. The problem is that the money lost compounds over time. If someone draws benefits at age 62, then by the time they reach age 92 they will be losing a full month of income!

The changes being proposed are an insidious way of robbing the elderly as they grow older.

What makes these proposed changes even sadder is that according to surveys[1], 84%of people believe current Social Security benefits do not provide enough income for retirees, and 75% believe we should consider raising the amount of benefits paid and 68% support an outright raise in benefits.

In Washington, both sides of the aisle are hopelessly out of touch with ordinary Americans.

Social Security Is Remarkably Effective

Social Security has been a very effective program for combating poverty among the elderly. In 2012, approximately 9.1% of the population of the US age 65 and older lived in poverty. Contrast this with a poverty rate of 21.8% for children 18 and under, or 13.7% for adults ages 18 to 64. It’s also worth noting that under a new supplemental measure of poverty created by the US Census Bureau that takes into account other sources of cash payments or benefits such as SNAP (“food stamps”) and tax credits but also includes the cash cost of healthcare not covered by Medicaid or Medicare, the poverty rate for seniors rises to 16.1%.

Since the government started keeping data on official poverty levels in 1960, the poverty rate among those 65 and older has fallen from a high of 35%. Large increases in Social Security benefits from 1959 through the 1970s contributed to a steep drop in poverty rates. Poverty rates among those 65 and older continued falling but at a more moderate pace during the 1980s, 1990s, and 2000s except during recessions.

While Social Security has done well to keep seniors out of abject poverty, it is grossly insufficient to meet all income needs in retirement. According the Social Security administration, the average retiree is receiving $1,230 per month, or about $14,760 per year.

Unfortunately, due to the recession, poverty rates have started rising. Poverty rates among children have risen from 16.2% in 2000 to 21.8% in 2012. Poverty rates for working age adults have skyrocketed from 9.6% to 13.7% during the same period. Social Security has been instrumental in keeping the same thing from happening to seniors. The poverty rate among seniors was 9.9% in 2000 compared to 9.1% in 2012. Poverty rates for seniors, however, are now starting to tick higher with 2012 seeing the largest increase in poverty rates among seniors in the last decade.

For many seniors, Social Security is their only form of income in retirement, and living on less than $15,000 a year is a challenge to say the least. While programs designed to help the less well off, such as food stamps, heating subsidies, housing vouchers, and so forth, are sometimes vilified in the press and by politicians as just lining the pockets of the lazy; in fact, a majority of the benefits dispersed in those programs accrue to children, the disabled, and the elderly. In 2012, for example, 49% of all SNAP (“food stamps”) benefits went to children, 8% went to the elderly, and 20% went to the disabled. For programs such as LIHEAP, which provides cash assistance for heating bills, virtually all benefits accrue to households that contain an elderly person, a disabled person, or a child under age six. Housing assistance programs, such as Section 8 vouchers, see a plurality of their aid go to the elderly. In 2010, 49% of all Section 8 aid went to the elderly or the disabled (versus the categories of TANF recipients [those subject to work requirements], non-TANF, and others).

The fact is a very large chunk of social benefit payments are flowing to the elderly (with children being the other large demographic). In recent years, politicians on both sides of the aisle have been making cuts to many of these programs. For example, LIHEAP was funded at $4.7B which only met a quarter of the need in 2011, but Obama proposed cutting the funding to $3B for 2012. TANF (“food stamps”) have been the target of cuts, mainly from Republicans but with plenty of help from complicit Democrats, with a $5B cut coming on November 1 of this year. (Happy Thanksgiving from Washington!) Even larger cuts are being discussed.

For seniors, Social Security remains the one stalwart program that provides income they can count on. With severe cuts coming to many programs that seniors count on, they are even more dependent on Social Security to remain out of poverty. In light of the cuts made to other programs, the proposed cuts to Social Security would be especially draconian.

It’s also worth noting that this kind of spending has a positive effect on the economy. Every dollar spent by the government on Social Security, TANF, LIHEAP, or housing vouchers generates anywhere from $1.50 to $1.80 in economic activity. By way of contrast every $1 spent on something like the military generates only around 80 cents in economic activity (and if you take a look at all the defense contractors in our investment portfolio you certainly can’t call me biased!).

Not only will cuts to Social Security harm seniors, those cuts will also harm an already fragile economy. When seniors receive less income, they spend less. Since most Social Security payments are spent on necessities, payments have a high fiscal multiplier so cuts in payments cause greater harm to the economy.

Why Cuts Are Being Proposed

Three words: Wall Street + taxes.

Let’s tackle the first two words: Wall Street. Wall Street desperately wants to get their hands on your Social Security money, so they can manage it. If Wall Street were managing an investment portfolio the size of the Social Security trust fund and charging a somewhat typical 1% fee, they would make $27B per year. Wall Street desperately wants to get that money under their contact, and there are two basic ways to do it.

Option one is to convince everyone that they will magically be able grow your money beyond what you might get from Social Security payouts. Given the widespread public disdain for Wall Street and the big banks, this option has little chance of success in the near term. When the stock market does well, however, such as during the beginning of the Bush years when this trick was last tried, it has a better chance of success.

Option two is more sinister but very ingenious. You simply “break” the program so it is unappealing and appears dysfunctional (never mind that you were the one who broke it). By advocating for cuts in Social Security, Wall Street can make the program appear not to be working. If the cuts are successful, you will no doubt soon hear cries of how the low level of benefits provided is just not acceptable and we need to do something. People may become frustrated with Social Security and start seriously considering an alternative. And Wall Street will be right there waiting with the alternative: Imagine how much more money you would have if you just privatized Social Security and let them manage it! Such a strategy has been tried and completed successfully in other countries and with privatizing other social services (for example, private, for-profit charter schools as an alternative to defunded public schools).

The last word is pretty simple. Taxes. When Franklin D. Roosevelt created Social Security, he also created the bizarre, nonsensical system of accounting that the program uses for political reasons. When you and your employer pay FICA taxes, that money is nominally placed in the Social Security Trust Fund. When Social Security benefits are paid out that money again nominally is paid out from the trust fund. FDR did this for political reasons to try to prevent Social Security from ever being destroyed by politicians. He reasoned that if people believed that they were getting “their money” out of the program when they retired, then they would resist any cuts or adverse changes to the program since they viewed it as their own money rather than some entitlement program.

Because we live with this fiction that FICA taxes fund Social Security, we now have created the “problem” that in about 20 years the number written in the government’s spreadsheet for the trust fund of Social Security will be smaller than the amount of money that is being paid out in benefits. One of the ways to fix this non-problem is simply to raise payroll taxes. One widespread idea is to raise the cap on the amount of income subject to FICA taxes. Right now, only the first $113,700 of income is subject to FICA taxes. Everything after that is not subject to FICA. By removing the cap and subjecting all income to FICA taxes, the number on the government’s spreadsheet for the amount in the trust fund will be very big–big enough that the amount paid out in benefits can last another 80 years or so before the number on the spreadsheet starts getting smaller.

For many of the ultra-wealthy, however, Social Security is not part of their retirement plans. Even the worst corporate executives still receive gold-plated retirement plans and sky high compensation. For many people making a few hundred thousand a year, Social Security payments might, and probably are, part of their retirement plans. But the ultra-wealthy don’t need or particularly want Social Security benefits, so they do not care much what happens to the program. But they do care deeply about their taxes. Therefore, it is in their best financial interest to push for cuts in the program rather than take the chance of a possible tax increase.

In the accounting fantasyland of the government, there “appears” to be a “problem” with the number on a spreadsheet not being big enough. Back in the real world, Social Security is not funded by FICA taxes nor from payments from the trust fund.

How Social Security Really Works

Social Security funding works like this. Right now, the US has about 314 million people, of whom 58.6% or 184 million are currently employed in some capacity. These people generate all of the goods and services that are for sale. These people also get all of the income available in the economy. Also, the goods and services need to be purchased right away; they cannot be saved or hoarded for later. A barber can’t save a haircut for later. You either get your hair cut now or you don’t. You can’t stockpile future haircuts for when you retire. Some things might be able to be saved. You could certainly buy a car now and put it in storage to use 30 years from now when you retire. But it will lose a lot of its utility. You would have taken something worth say $30,000 and turned it into something worth maybe $1,000.

If current workers were the only ones who could buy things, what would happen? All of the workers would consume almost all of the goods and services available, since they receive all of the income. Nothing would be leftover for anyone else. But every society has some members who do not work: babies, children, disabled, sick, and elderly.  Do we want to live in a world where no one in any of these groups gets anything, except what they can beg, borrow, or steal?

There are about 62 million US retirees or disabled persons. What we do is enact some type of tax on the workers that reduces their income. Now all of the workers can consume only a fraction of the total goods and services available. We also have the government pay out some type of income to the 62 million retirees and disabled persons. They can then use this money to consume the leftover goods and services that are not consumed by the workers.

It’s important to remember that the point of the tax is to reduce the demand from the workers. The taxes do not serve to fund anything. The point of the payments from the government is to ensure that all available goods and services in the economy are being purchased. If there are leftover goods and services, then the payments should be increased or the taxes decreased.

Right now, the US has around 20 million unemployed and underemployed people, and record low industrial capacity utilization. We have plenty of idle capacity to take care of new retirees. The Social Security program is not in any kind of danger of being unable to meet the demands of existing and potential retirees.

 



[1] 2013 NASI poll

20 Responses to Obama wants to cut Social Security

  1. Excellent post and very enlightening thanks.

    • Ladies and Gentlemen:

      I want my SS money in one payment with compound interest since 1961 ($2,000,000). The Legislative branch and the Executive branch stole the money out of the SS fund and replaced the money with IOU’s. The BS that SS fund is in the black may be true in that the current revenue from SS taxes is in the black, but the SS Trust Fund is empty of original deposits. All legislators and the president that signed into law the raids on the SS fund should be incarcerated until they all pay it back. If I, as an employer pulled such a scam, I would be thrown in the “Slammer” and kept there until [edited by admin].

      [off topic comment removed]

      CXJ

  2. “The changes being proposed are an insidious way of robbing the elderly as they grow older.”

    Not really. Today’s elderly, as usual, will be unaffected. Such a change will affect the elderly of 30 or more years from now. Today’s elderly will be dead by then. Tomorrow’s elderly will be busy dealing with the crumbling infrastructure and low productivity that comes about from lack of investment today.

    • Dr. J. Michael Pece

      While you are partially correct in your assumptions, you are wrong when you state the cuts will not hurt the current social security recipients. If inflation is running at 6% and we get a 1.6% increase or less, we are now living off 4.4% less income. Two/three years ago we went two years with no cost of living increases thus we fell quite behind. Yes those who receive benefits 30 years from now will be adversely affected, the current recipients are already and have been affected by these games with the cost of living increases for years now.
      Now it is going to be worse. By the way, Social Security and Disability are not “entitlements”, they were paid for with our incomes.

  3. Sounds like a bit of a slippery slope. In Canada, the conservative government raised the age for old age security from 65 to 67 years. Two years of lost benefits upfront. The story was this federally funded plan was unsustainable with eligibility set at 65.

  4. So, if I’m reanding your theory to be correct, Mr.Strubel, then it would follow that actually increasing wages and creating new livable wage jobs in and of itself would solve the Social Security/Medicare/Medicaid “problem” by adding new sources of revenue that would be eligible for the FICA taxes that would be transferred into higher benefits. Would I be correct??

    I’m not so sure, though, that you can reduce the FICA tax to merely “reducing the amount of income”, since there are far higher reductions in terms of taxes used to fund everything from excessive defense spending to the surveillance and incarceration systems. Redistribution of income via progressive taxation combined with transferrence of revenue priorities to domestic social spending and public infrastructure could offer as much a benefit to maintaining and keeping Social Security/Medicare/Medicaid benefits as going to fiat currency; and reforms such as Single Payer/”Medicare For All” and replacing traditional welfare programs with a generous guaranteed annual income system that complements a Job Guarantee, could also go pretty far, even before considering cutting or removing the FICA tax

    I do agree, though, that fiat currency can and would be useful in dealing with rebuilding public infrastructure and education. I’m just worried about using it as an all-in substitute for traditional redistribution.

    • Anthony, there are no proposals in this article. It merely describes how Social Security Insurance works *now* irrespective of the semantic games played by terms such as “trust fund” and “getting your money back.”

      SSI as *currently construed* is not a retirement plan. It is an intergenerational assurance program.

    • Mark Robertson

      There is no need for a FICA tax at all, since the FICA tax does not pay for Social Security or Medicare, just as federal income taxes do not pay for the federal government.

      The federal government creates its money out of thin air by crediting the bank accounts of recipients.

      Hence, the federal government does not need or use tax revenue. Indeed, the federal government destroys all tax revenue upon receipt, by eliminating the revenue from the money supply. (Neither does the federal government need to borrow in order to spend. Hence the “national debt” is trivial.)

      The only legitimate purpose of federal taxes is to maintain the overall integrity of the banking and money system. Since taxes can only be paid in dollars, the dollar maintains its sovereign status.

      Social Security/Medicare/Medicaid have infinite money. They have no funding problem. Instead, they have a political problem: the rich want to eliminate or privatize these programs in order to widen the gap between themselves and the masses. Therefore the rich pay politicians to continually attack social programs, falsely calling them “unsustainable” (when in fact they are infinitely sustainable).

      All talk about “solvency” and “trust funds” is nonsense that confuses the masses, and keeps them submissive. No federal program can ever have a “solvency” problem. And as for the SS “trust fund,” can anybody locate it, or prove that it even exists?

      Money for SS does not come from any “trust fund.” It is created ex nihilo, i.e. out of thin air.

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  7. Aloha! Ask any social security recipient and their main concern has nothing to do with how long can the social security system stay solvent, but how long can the recipient stay solvent! I pay into the system using 197o/1980/1990s dollars and when I retire I get 2020 dollars. A huge difference in purchasing power.

    The system started off wrong from the very first beneficiary. Her name was Ida May Fuller:
    She retired in 1939, having paid just three years of payroll taxes. She received monthly Social Security checks until her death in 1975 at age 100. By the time of her death, Fuller had collected $22,888.92 from Social Security monthly benefits, compared to her contributions of $24.75 to the system. She later said about going to the Social Security office, “It wasn’t that I expected anything, mind you, but I knew I’d been paying for something called Social Security and I wanted to ask the people in Rutland about it.”

    Ida was on welfare after her second check. Whats that a 92,000% gain on her original investment? Not exactly the perfect model for solvency. Even my own Mother who only worked about three years in her adult life back in the 1970s is getting $900 per month now. She passed her nominal contributions back in 1981. Everyone knows it is near impossible to live on $900 a month in practically any major US city except maybe Detroit!

    It’s important to remember that the point of the tax is to reduce the demand from the workers. The taxes do not serve to fund anything. The point of the payments from the government is to ensure that all available goods and services in the economy are being purchased. If there are leftover goods and services, then the payments should be increased or the taxes decreased.

    The above analysis is very close to the old “company store”! I agree why pay taxes?
    In the old days before social security if grandpa wanted something the family bought it for him. Now the government is the pseudo-family. Uncle Sam takes on new meaning …

    On the US Treasury FY2013 statement it shows total net tax revenues(gross receipts minus refunds) for the year are consumed 100% by only four line items. Social Security, Medicare, Medicaid and Defense Vendors(Vendors only, not total military budget). Tax revenues, whether individual, payroll, estate or corporate make up the majority of deposits into the US Treasury bank account at the Federal Reserve so what makes up for the tax revenue deficit? What funds the other 29 line items? My guess is mostly debt … You cannot fund a 33 line item US Treasury statement on just tax revenues alone. In a “pay-as-u-go” world the US Treasury would have to eliminate a lot of line items, but we don’t have a “pay-as-u-go” world … we have a “debt-as-u-go” (aka: “promise-to-pay-as-u-go”)world. Per the US Treasury the “statutory debt ceiling” is suspended until Feb 7. I would like to see the debt ceiling be eliminated permanently since it is now just a “political photo op”! That is one way to resolve political budget deficit grid lock forever!

    We all know what happens when you hand a politician or any human being a blank check or a blank EBT card. Funding the system was never an issue and every system has inequality. It comes down to who spends your wages better? You or some stranger in Washington DC? Even more than that who is “entitled” to spend your wages? Now that’s “entitlement” of a different color …

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  9. 1.More of my wages are going into social security this year, since the base was hiked up about 3 grand. Jes sayin.
    2.Social security is a grand, fantastic, fabulous deal for non working spouses. This is politically incorrect to point out. Not only do workers get an exemption for this dependent, that dependent can collect 50-100% of the worker’s benefit for life, including divorce events. A crisis of generosity.
    3. The next generation of workers, who will be paying my benefits, are likely to in aggregate be poorer. Unless we have more of them, many more, or the economic growth of this country increases by more than projections, a crisis of cash flow will actually occur. We don’t have a crisis now.

  10. Everybody cries about money. Give me give me they say. Go to the USA and get the free money!

    Good Lord it wasn’t that way when I grew up. Americans, as I was taught as a boy, were hard working folk who took care of themselves and their families and even their dogs, neighbors and those in need.

    Americans were once a strong people. Today, well, can we say different? [edited by admin]

    It is time for Americans to be Americans like those that came before. This will happen, perhaps not with the current young generation. Eventually long after I am dead, I am sure we will see Americans in the future as my generation once saw Americans in the past.

    Not as heroes but only as good people that we are.

  11. I do believe in simplicity, which may be my down fall. In my humble opinion, I believe the age of retirement for SS benefits should be raised, whether it be two years or more is certainly something that should have a serious discussion and implementation.

    My second suggestion is the Government/Politicians NEED to stop with their retirements/benefits being separate from we the people they are suppose to represent! They certainly are no better than we are and are suppose to be there representing US, NOT their own pockets!

    Simple statements and most Americans believe in this thinking!

  12. “Social Security has been a very effective program for combating poverty among the elderly.”

    Social Security has been a very effective program for transferring poverty from the elderly to their grandchildren.

  13. My what an interesting read! And such a rush, actually believing that I will see retirement via Social Security along with the others in my generation (the youngest of the Baby Boomers). Will it survive the loss of the dollar’s sovereign status? Well, of course, I’ll get that $900 a month even if that buys a loaf of bread – maybe. Yesterday, I went to the store and the price for a head of lettuce actually doubled overnight to $1.99/head. And I eat a lot of lettuce. But no worries, I can always grow my own if I can meet the mortgage payment on a small acreage with a modest home (say $2200/mo) on a construction worker’s wages which is about $2000/mo now if I can just go back to work sometime soon. Yes, the future looks very bright indeed!

  14. I’ve worked since I was 16 years old…I’m 59 now! Half my life the politicians have robbed the social security account for this or that. My thoughts are keep the crooks out of my funds that I have paid into the account all these years. Make congress part of the same program as the rest of us and you’ll be amazed at how fast any problems are fixed. That goes for health care too! Don’t allow congress pass any law that does not or will not apply to themselves and let’s put term limits on them and end career politicians that see being elected to his or her office as hitting the lottery!!

  15. Sadly we cannot afford SS for everyone. The ‘Greatest Generation’ has elected politicians who have stolen, borrowed and scammed future generations. While I don’t want my grandmother losing sleep about money, I also cannot afford to keep pumping in cash to a system I will never see a dime from

    While I don’t always agree with President Obama this is the first of many stepa

  16. Social Security is NOT an entitlement; it’s NOT something created out of thin air; it is, however, a RETIREMENT SAVINGS ACCOUNT into which seniors CONTRIBUTED for many decades; and, into which current private sector employees now CONTRIBUTE.

    Therefore, any attempts at cutting or eliminating Social Security is a FELONY, with a minimum sentence of five years; since, such action is known as GRAND LARCENY by FRAUD. This program was initiated by the administration of FDR to create a safety net for retired employees, who would’ve either died from starvation or weather-related causes.