Don't Cut Social Security!

Why reducing retirement benefits to pay down the deficit is a terrible idea

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President Obama's budget, unveiled today, proposes to cut Social Security benefits by changing the formula used to calculate annual cost-of-living adjustments (COLA). This is a bad idea masquerading as a painless technocratic correction.

The specific proposal is to calculate cost-of-living adjustments (COLAs) based not on the CPI-W (consumer price index for urban wage earners and clerical workers) but on a different price index that takes tries to take into account the extent to which consumers change their purchasing behavior from higher-priced goods to lower-priced goods. This would probably reduce the annual COLA by about 0.2-0.3 percentage points, thereby reducing federal government outlays on Social Security benefits. The sneaky thing about the proposal is that it can be defended on reasonable-sounding grounds: since some economists think that chained CPI is a better measure of true inflation than the ordinary versions of the CPI, it can be framed as simply reducing COLAs to what they should have been anyway.

There are a number of problems with this proposal, including the fact that the real cost of living for the elderly probably increases faster than the CPI-W, since the elderly consume a disproportionate amount of health care, which has a higher inflation rate than the overall economy.*

More generally, you don't actually save any money by reducing Social Security checks. There's no "waste" in Social Security. It's a program in which one set of people pays cash to the government and the government pays virtually all of that cash back out to another set of people. Every dollar in lower benefits is one dollar less in someone's wallet.

A Horrible Idea Whose Time Has (Apparently) Come
There are a number of ways to look at this. Many of the people supporting lower Social Security benefits would vehemently oppose higher taxes. Let's say I propose a new tax, at a rate of 0.3 percent of income for each year that the taxpayer lives beyond the age of 67, so a 77-year-old person would pay 3 percent. That tax would do roughly the same thing as switching to the chained CPI, since, for most elderly people, Social Security is most of their income. My proposed tax would be immediately laughed off, even if I tried to argue that it simply corrects for "excessive" COLAs. The point is that cash is cash. Framing it as a technical correction doesn't change the fact that the older you are, the less money you'll get. And calling it a reduction in "wasteful" government spending doesn't mean that the total number of dollars available to people will magically go up.

There are things the government does that produce social benefits out of all proportion to their budgetary cost, like basic research. There are things it does that are tremendous wastes of our money, like invading countries that pose no threat to us. And there are things whose benefits are roughly equal to their costs, like Social Security. If we want to reduce government spending, we should look for the second category of expenditures. The government is just a tool that we use to do things that are difficult for us to do as individuals. In the case of Social Security, cutting government spending for the sake of cutting government spending--and ignoring the fact that those spending cuts come dollar for dollar out of our own pockets--reflects a senseless fetishization of the federal government (typically by people who insist that they care about individuals, not the federal government).

Presented by

James Kwak, an associate professor at the University of Connecticut School of Law, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.

James Kwak is an associate professor at the University of Connecticut School of Law and the co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. He blogs at The Baseline Scenario and tweets at @JamesYKwak.

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