The Congressional Budget Office (CBO) released a report that evaluates the consequences of adopting the chained CPI. I was surprised by the results. The numbers are “so good” that this approach will rise to the top of the budget cutting debate. I’m sure that was the intent of the folks at CBO with this timely release. (CBO LINK)
If America is going to accomplish anything with the debt/deficit issue it needs to either generate more revenue, or cut expenses. Some combo is going to be the outcome. The numbers have to be big. Anything less than $1T over ten years is hardly worth the effort. $2T would be desirable, but hard to achieve. Something around $1.5T over ten-years would take all the bull-shit over this issue off the front pages for a few years.
So we “need” $1.5T stretched out over a decade. The CBO concludes that we can come up with $340B (25%) of the nut by changing inflation calculations. That’s a big down payment. Some details:
Changing the CPI has consequences to both government revenues and expenses. Expenses, like Social Security and other retirement programs will be reduced from what is now scheduled. Tax revenues will rise as a result of the inflation adjustments on tax brackets, and changes to refundable tax credits under ACA. The breakdown:
- For every dollar of increased revenue there is $1.7 dollars of expense cuts. Is this “fair”? I don’t know, but it isn’t unfair.
- 59% of the savings comes from reduced Social Security payments, while 17% of the reductions come from the retirement plans for the Military and Federal workers. The net reductions hit all of the government retirement programs equally, so this also seems fair.
- Adjustments to COLA will result in relatively small changes in early years. In 2014, the expense reduction is only $3.4B, in 2023 the reduction will be $70b. This a “desirable” outcome as those who will lose benefits will have a significant time to adjust to those changes.
- Most economists believe it would be a mistake to make sharp cuts in spending today. The consequences of adjusting COLA are consistent with what the economists “want”.
- If the changes in COLA were extended for another ten-years beyond 2023, the cost savings would get larger and larger. Over a 75-year period the changes in COLA would save trillions, but in 75 years a cup of coffee will cost $5,000, so I’m not sure what any of these big numbers really mean.
Having discussed why the changes in COLA are economically significant, its now time to look at what is wrong with this proposal.
- The AARP, the liberal press and many progressive politicians are going to hate this plan. The mantra “Don’t touch Social Security – it’s off budget!” is going to be heard again-and-again. Changes to COLA can only be accomplished as part of a broader plan. That plan must included changes to Medicare and Medicaid. It will require that more revenues (eliminate deductions) be part of the deal. I have a difficult time believing that a “big deal” can happen given the rancor in D.C. today.
- The Generals/Admirals and Federal workers are going to get clipped along with SS recipients. I see that as a big problem.
- In the CBO projections there is an assumed increase in SNAP costs. SNAP = Food Stamps. Why would Food Stamp costs go up if COLA is adjusted? The CBO answers this:
CBO estimates that the proposal would reduce income to individuals who also receive SNAP.
Aha! Poor people will get poorer as a result, and therefore they will qualify for more Food Stamps, so costs go up. This is an unintended consequence, but it is a dumb one. This demonstrates how difficult it is to actually “fix” problems.
- Adjustments in COLA represent across-the-board cuts. This is stupid. 70% of SS beneficiaries NEED the benefits they will get, 30% don’t. There is no “fairness” to that outcome. This may prove to be the fatal flaw of this proposal.
- The changes in the COLA formula should result in “positive” YoY changes. But there is no guarantee according to the CBO:
The actual difference in any year could vary noticeably from that average.
The estimates behind the “good” results are flaky. I hate it when that happens….
- The projected increase in revenue comes substantially from how the Affordable Care Act (ACA – Obamacare) will be “paid” for. But ACA doesn’t exist today. This means we were sold a bill of goods when ACA was invented.
Adjustments to COLA means that the cost of healthcare for all Americans will be higher than what has been previously projected. So the biggest changes in the US healthcare system in 50 years is put on (more) shaky legs when COLA changes are made. This is the Whack-A-Mole problem. When one problem is “fixed” it pops up someplace else and causes even bigger problems.
- The proposed changes to COLA have a significant consequence to SS beneficiaries. But compared to what is programed to be spent, the changes are a drop in the bucket. These charts tell the story:
- To me, the issue of greatest concern is how SS will influence the Debt Owed to the Public. The following graph looks at the projected negative cash flow at SS with and without changes to COLA.
Conclusions:
Changes in COLA are coming – provided it is packaged with other measures that (A) decrease Medicare and Medicaid spending, (B) reduce military spending, (C) reduce other discretionary spending and (D) the elimination of many personal income tax deductions. What’s the probability of that package being realized from the current crop of legislators? Does Zero seem about right? I don’t see it happening.
Adjustments to COLA can add up to big numbers. But the numbers we are faced with are so large, the COLA changes are really just a rounding error.
Dale Coberly from Angry Bear tried post a comment, failed with the captca. Dale and I spar non stop on matters of SS. I think he’s from Mars, he thinks I’m from Pluto. I’ll never agree with Coberly, that doesn’t matter. I do respect him. His words:
krasting
you miss the point. in the first place, your “barely moves the needle” looks to me on your chart like a fifty dollar a month cut from an SS benefit of about 1500. I don’t know where you get the number, but the actual estimate is not so much different that it’s worth quibbling about. Thing is though, if you are trying to live on 1500 a month you are going to notice that fifty bucks.
More to the point for me is that the whole chained-CPI is thoroughly dishonest and disgusting. The claim is that because people will switch to something cheaper when the price of what they want goes up, therefore the price of what they want did not go up. This is completely dishonest as a “consumer price index.” It might be “more accurate” as a “cost of living” index.. in that if the cost of the food humans are used to eating goes up, you can still “live” on cat food. The folks promoting the chained-CPI know this. That makes them liars of the worst kind… they intend to hurt people who can’t defend themselves.
Finally, Social Security has nothing whatsoever to do with “the deficit.” SS is insurance that workers pay for with their own money against the possibility that they won’t have “enough” when they retire. To keep the premiums down, “enough” is set at “barely enough.” The chained CPI cuts benefits to “less than barely enough.”
And what is so aggravating about the whole thing is that the workers could avoid any benefit cut at all just by raising their own insurance premium (you know it as the payroll “tax”) by eighty cents per week each year. They will never feel this. They will feel the sixty to ninety dollars per month (my calculation) cut from their benefit check of about 1000 dollars per month (in today’s terms) when they are in their eighties.
Unless they have been lucky on the stocks and bonds markets. But the fact is that well more than half the workers have NEVER been lucky on the stocks and bonds markets. That’s why SS was invented.
It is wrong to the point of dishonest to call this a “government expense.” It’s the workers’ own money.
Social Security is an insurance policy ? My understanding of an insurance policy is you pay a set premium for a defined pay out benefit for specific coverage. SS can and has seen changes to both “premiums” and “benefits” over the years and I think we will continue to see adjustments in the future.
Social Security has nothing to do with the deficit?
Well then , why does the deficit increase when SS Treasuries are redeemed to make up for the cash shortfall (as has occurred since 2010)?
An insurance policy?
Well, disability insurance and life insurance is involved.
But, when people at the top third tier receive only 15 cents in benefits for every dollar conributed, I can’t think of too many insurers who would survive withthat measely payout.
And insurance is paid with premiums, not with taxes.
Premiums go to the insurer.
Taxes go into the Treasury’s general fund (including FiCA taxes) and become indistinguishable from other monies.
In addition, if an insurer tapped into its reserves to pay claims, a nd had to borrow money to do so, it would be issued a cease and desist order by any reputable Department of Insurance.
‘Don Levit
Coberly: “… the whole chained-CPI is thoroughly dishonest and disgusting…”
Sounds like it would fit right in with stealing from children to pay wealthy grandparents — better known as Social Security.
SS was invented as a supplement to retiree income, and only for a couple years (on average). It was never intended to be 100% of retiree income — at least not according to FDR who, unlike Mr Coberly, invented Soc Sec system. Something tells me FDR could probably work the captca thing, too. Most humans, even high school dropouts, can pass the captca test after a couple tries (if not the first try)
BTW — SS was invented at a time when total government spending (federal state and local combined) was less than 20% of GDP. Today, total government spending (fed, state, local) is pushing 40% of GDP — and that is before ObamaCare makes it worse.
As much as anything else, SS got crowded out by over-sized bureaucracies. We can’t waste money on transfers to grandma and waste money on bureaucrats and waste money subsidizing foreign dictatorships — something has to give.
And it won’t be the indebted generations that the CBO thinks will somehow have “off balance sheet” magic beans to pay for empty promises we never made.
Social Security and federal bureaucrats enter the cage — only one can come out. That is not a prediction, it is the most the country can afford to keep if we don’t want to end up like Detroit or Chicago.
I think the argument here centers around whether SS, which could and should be interpreted as an insurance program, has any float at all. If there is no money in SS then honoring the SS program will be an obvious big expense and thus very much impact the deficit, contrary to what Angry Bear is saying. The $1T+ question is: Is there any money in the SS program? My take is that there is money in these programs when the g’ment wants there to be money in them – just give them 24 hours to shift things around. It is a game of musical budgets until the last government program is left, but by then the music has stopped.
Define insurance? When do benefits get eliminated?
If one had $50 million – no SS. Okay with that?
$25m Still ok?
$10m?
$6m?
$3m?
I think the number is above $3m but below $6m.
If you have a net worth over $3m – congratulations! But you don’t need the “extra” $24,000 a year that SS is paying you.
Hmmm. $3M at 1% is…… Holy cow – that “extra” $24,000 almost doubles my retirement income! Ok.Ok. … so let’s do the CFP number of 4% on $3M. Holy Cow – that “extra” $24,000 still makes a very significant difference to my retirement.
You mean SS all these years has just been a crummy commercial – son of a bitch!
Bruce,
I think the number will be largely defined in terms of non-real estate liquid assets. And once we exclude illiquid and soft r.e. assets a very low SS means test number is possible. Try $1 million in cash and marketable securities. Even with no interest that sum provides twenty years of a $50k annual allowance draw. Or 50 years of a $20k annual allowance.
Ditto for those drawing above average pensions from sources outside SS. Seriously, does someone drawing a $10k monthly pension from any source NEED SS? Especially if the alternative is cutting $50 or $100 from someone drawing $1000 or less? And what’s THAT lower limit? $5k per month? Even better, people with outsize pensions usually have outsize liquid assets.
Let’s see now. “They” own two homes (one in Florida on a golf course) free of mortgages, have $1 million in liquid assets, several BMWs and Mercedes, a boat and get $7k a month in pension and annuity payments.
Jump cut the advocacy ad to an old military vet or minority dining on cat food under a 10 watt bulb in an unheated 4th floor walk-up.
See? Problem solved.
Obama’s latest announcement that he is now open to discussing SS and Medicare reductions is merely an announcement that he’s open to cutting the largely GOP higher $ demographic in those programs.
The government needs to cut state and local spending which has more than doubled sinse 1970 adjusted for inflation and population growth.
State and local taxes have increased from $1.5 trillion in 2000 to $2.5 trillion in 2012.
It’s hard for DC to squeeze taxpayers for more money when the states and local governments are nailing them for more and more every year. The worshipping of education, teachers,cops and fireman has become cult like and crazy. The giant and growing nanny state baby sitting jerry spring nation at the state level has also gotten out of control. Department of children and families and criminal justice machine are massive.
IN CT. there is a website called yankee Institute that hammers state spending and vermont has Ethan Allen institute that does the same.
Our government is federal state and local, it spend over $6 trillion.
state and local collect as much money as DC does so they are half the problem and a huge part of the waste.
I have two sort of opposing opinions here. While I do think we need to do something on Social Security or at least entitlements as a whole, the CPI question turns me off because I do believe that all measures of inflation put out by the U.S. gov’t understate inflation. I’ll point to the usual reasons(hedonics, substitution effects, and use of equivalent rent instead of home prices). I’ve yet to hear of a social security recipient who believes their social security check goes farther as they age as opposed to when they first got one.
We might be better off raisin the retirement age for when social security kicks in and allowing for investment in baskets of index mutual funds covering stocks, bonds, etc. I have far more faith in my 401k being there than my social security check,
Sounds good but it’s those darn unintended consequences that spoil the party. What happens when you raise the retirement age is that the 68+ year olds start taking away those jobs that the 18-25 year olds traditionally took and need. I would rather have a 68 year old roam the streets than a 20 year old (kidding).
Also, don’t put too much faith in those 401k’s. The g’ment has its eye on raising tax rates on those assets too, when the time comes to start collapsing them. Ain’t nuttin’ sacred anymore.
If the idea is to destroy the middle class to let the rich own everything of value, the current SS system is ideal. First generate large unemployment coupled with an intentional lack of care of the economy so that it continues to die rather than get better. Then manipulate all forms of investment so that they generate low yield. As the retired lose interest income due to low rates and the cost of living goes up and the SS is fixed to a minimal raise, the sale of hard assets is the only way out for granny.
The tag line for the Democrat Party “they are for the little guy” is not truth. The Democrats are “for” the little guy as in out to get as a target to strip assets from, not “for” as in to protect. Government is out of control, City, County, State, and Federal. For the retired and just tired, this is not ending well. For those that cross over from Mexico and get benefits that are not in that country, this is a great situation. Most people do not begrudge helping others, but it has to be factored into the numbers and discussed.
The government payroll, federal state and local, needs to be a LOT smaller or else this entire discussion is moot. It doesn’t matter if Social Security was ever a good idea, the people who are expected to pay the costs going forward cannot afford to pay.
Ask the federal bureaucrats if Social Security should be canceled or if the federal government should be canceled — and see how many miliseconds it takes them to throw grandma and grandpa under the bus. Means testing might delay this choice — but even if implemented, it won’t delay the decision long enough.
If you wanted to “save” social security, the last chance to do so was when former Treasury Secretary John Snow tried to privatize it. Maybe it should be privatized (worked for Chile), maybe some other solution might have worked. But that was (past tense) the last chance. It is gone now.
PS — Snow was also the guy who wanted to put a lid on the mess on FNMA / FHLMC, but his efforts were stopped by the corrupt Barney Frank, as part of his nonsensical lie on the floor of Congress that FNMA was solvent and even if (WHEN) it went bankrupt, it wouldn’t cost taxpayers….
Snow was stopped from reigning in FNMA, and stopped from privatizing Soc Sec… Now both scams are too big to fix.
Bruce — would it be possible for you to go back to talking about the financial markets?
You have researched this corpse called Social Security to death. It is terminally ill, and there is absolutely nothing you can do to save it. Means testing is just a way for the criminals in Washington to stick their nosey eyes into everyone’s bank accounts — and even if implemented it won’t do anything but delay the inevitable.
Lets see a post about how we can make a couple bucks in the markets or international trade or business or somewhere — before we get more posts about how to spend money we don’t have.
the tax policy center on the CBO report cited above (as proposed by obama):
Republicans and many economists argue for shifting to a more accurate inflation measure, called the chained Consumer Price Index (CPI). President Obama would support a version as part of a fiscal grand bargain. Because Social Security benefits would likely grow more slowly under this measure, many Democrats and social insurance advocates strongly oppose the idea.
But a new Congressional Budget Office estimate shows fiscal effects that chained CPI backers might not want to see. It turns out that shifting to the new inflation measure would raise taxes by nearly as much as it would slow Social Security spending over the next decade. Indeed, after 2021, the adjustment would raise taxes more than it would cut projected Social Security benefits.
The whole debate on what to decrease from Medicare and Medicaid spending and military spending has been exhausting. Nobody wants to make any concessions and nobody has any common ground to start to work with. It is pretty scary that people cannot see that if they just protect their own interests and are not willing to think in terms of what is best for the nation’s future. The key word future, not just right now. What do you think?
Just after study a few of the blog posts on your site now, and I truly like your way of blogging. I bookmarked it to my bookmark site list and will be checking back soon. Pls have a look at my web website too and let me know what you think.
[url=http://cheapchinajordans.2kool4u.net/]cheap jordans[/url]
http://cheapchinajordans.10001mb.com/