The low point between the two men [President Obama and Senator Bernie Sanders] was a 2013 meeting with other Democratic senators. Obama had just put a chained Consumer Price Index in his budget, a proposal that would cut Social Security benefits by tying them to the rate of inflation. Many Senate Democrats were angry about it. But when they arrived for the meeting, it was Sanders who bubbled up, ripping into Obama for giving in to Republicans and not understanding the impact of the cuts.
This is from Edward-Isaac Dovere, “The Hidden History of Sanders’s Plot to Primary Obama,” Atlantic Monthly, February 19, 2020.
The article’s focus is the one implied by the title. I found that interesting as political commentary. But the part I found most interesting was the behind the scenes wrangling discussed in the above paragraph.
The 2017 tax cut bill changed the index for adjusting tax brackets from the CPI to the chained index, a move that will make the tax brackets rise more slowly with inflation than they had, thus slowly increasing tax revenues over time relative to the baseline. That could be argued to be a legitimate change because the chained index is more accurate. But I thought at the time that they should also include a provision to adjust Social Security benefits by the same chained index. That would have caused Social Security benefits to rise more slowly over time. That was a lost opportunity. I understand that it was lost because they probably couldn’t have passed the tax bill with the provision. [The reason has to do with an issue called reconciliation; with the provision I wanted, the Senate would probably have needed 60 votes in favor and there just weren’t enough Democrats who would go along with the bill as it was; this would have been an even heavier lift.] Still, it’s disappointing and it’s slightly heartening to see that Obama took the growing Social Security problem seriously enough to propose slightly reining it in.
Note: Dovere is correct but misleading in saying Obama’s proposal “would cut Social Security benefits by tying them to the rate of inflation.” It would have done so: that’s the part that’s correct. But the article could mislead readers into thinking that Social Security benefits were not tied to the rate of inflation. They already were and had been for a number of decades. Obama’s proposal would have tied Social Security benefits to a more accurate measure of inflation.
READER COMMENTS
Alan Goldhammer
Mar 5 2020 at 11:38am
I don’t know how the numbers work out but Social Security is in a sense managed by taxing earnings pretty aggressively for those who have income from pensions and IRAs. If you file jointly such as my wife and I, 85% of the Soc Sec earnings are taxed if your adjusted total income is over $44K. this is a very low threshold for those who saved prudently for retirement. Of course as one ages, IRA withdrawals increase and it’s likely the person/couple will be in this taxable situation until they pass.
David Henderson
Mar 5 2020 at 11:53am
All true, but not directly relevant to my point about indexing.
Alan Goldhammer
Mar 5 2020 at 3:52pm
I know but a lot of youngsters who are not on Social Security are unaware of this provision which does add money back to the Trust Fund by limiting pay outs. The bigger question is why Social Security needs to be indexed and increased at all. The pension I retired with was fixed and what you saw is what you would get for the rest of your life, no increases at all.
If they did that it would instantly create millions of inflation fighters!
Mark Z
Mar 5 2020 at 8:49pm
I’m not sure we should want monetary policy to be shackled to the politics of social security. If we were already on a 0% inflation target this might not be as big of a problem, but under the status quo it would make it politically difficult for the fed to expand the money supply during a recession.
Matthias Görgens
Mar 6 2020 at 4:21am
Inflation fighters wouldn’t have to stop at zero.
Though what I would suggest is to index social security by nominal GDP. No need to worry about measures of inflation then.
robc
Mar 6 2020 at 6:06am
Or link it to nominal AIC.
BC
Mar 5 2020 at 11:24pm
Pension benefits are determined by actuarial criteria. Social Security benefits, like all government benefits, are determined by political criteria.
Alan Goldhammer
Mar 6 2020 at 9:50am
Pension benefits are determined by actuarial criteria.
I know in the case of my pension program that was not the case. The pension was based on a formula based on salary and years of service. The longer you worked and the higher you salary rose, the more your pension was. However, payments into the pension fund were based on an actuarial liability table. Four years after I retired, they dropped the pension plan in favor of an increased 401(k) program. Current employees had their pension benefits frozen at the level they were at. The was no impact on the pensions of retirees (thank goodness). I get yearly reports as mandated by US law and our plan is fully funded. the fund liability will of course decrease as the retiree numbers drop.
Lots of US companies and organizations are moving away from defined benefit pension programs. State and local governments should do the same.
Thaomas
Mar 6 2020 at 8:43am
The “missed opportunity” assumes that decreasing SS benefits is desirable. Why is that necessarily so? Indexing one way or another is (properly) a way not to have to decide very often about the tax/benefit formula, not a way to increase of decrease benefits per se. The real “missed opportunity” was in 1934 when FDR decided to use a capped wage tax to fiance the benefits rather than a consumption tax
Varya H.
Mar 6 2020 at 10:50pm
Not a “missed opp” but a foolish bit of political posturing. Chained CPI is in no way a more accurate measure of defining “inflation” for SS beneficiaries because it is based on the faulty premise that young,working urban households purchase the same goods in the same amounts (with the same ability to substitute) as the elderly and disabled. Hardly. Forgoing your latte is not the same as cutting your heart meds in half.
Of course one could construct a full version of the index of prices faced by the elderly and use that. Indeed,this is why the BLS was tasked in the 1980s with creating the CPI-E. Something that still hasn’t been completed. Prelim research does show more inflation in the elderly’s “basket of good” and less flexibility. No surprise. It is time for the federal government to provide the resources for BLS to conduct the research, conclude its analysis, and adopt a more accurate consumer price index for the elderly.
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