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Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

January 19th, 2011 2:24 PM

Making Social Security More Progressive: The Games They Play in Washington

The insiders in Washington really really want to cut Social Security, and they are prepared to say or do anything to do it. Among the latest lines is that they want to make Social Security more "progressive." This sort of rhetoric appeared in a report from the liberal Center for American Progress (CAP) in a plan that proposes substantial cuts in benefits.

To understand what CAP and other proponents of increasing the progressivity of Social Security mean, consider the idea of raising a marginal tax rate paid by many middle-income people from 25 percent to 35 percent. The current 25 percent bracket begins at an income of $34,500 for singles, and $69,000 for couples.

Raising this tax rate by 10 percentage points would be a substantial hit to tens of millions of families who are certainly middle class by anyone's definition. However, this tax increase would also be progressive. The bottom 60 percent of the income distribution would not be touched at all, and those just over the cutoffs would only see a small increase in their tax burden.

Nonetheless a couple earning $100,000 a year would see their taxes rise by $3,100, which is not a trivial matter for a middle-class couple. This is the way in the CAP plan for cutting Social Security benefits is progressive. It would lead to substantial reductions in Social Security benefits for people who earned an average of $60,000 or $70,000 during their working lifetimes. While such people earned more than most workers, such salaries don't quite put them on par with Bill Gates.

The reason why CAP wants to cut the benefits of factory workers and school teachers is because this is where you have to go if you want to have any substantial reductions in Social Security payments. Peter Peterson, the billionaire investment banker, is fond of telling audiences that he doesn't need his Social Security check.

However true this might be, Mr. Peterson's Social Security check, along with those received by all the other millionaires and billionaires in the country, really doesn't make any difference for the program's finances. There are not many rich people, and because Social Security is a progressive program, the billionaires' Social Security checks are not much bigger than the checks received by ordinary workers.

This means it doesn't matter for the program whether or not Mr. Peterson and his wealthy friends get their Social Security checks. When they talk about cutting benefits for "affluent retirees" or making the program more "progressive," they are talking about cutting benefits for schoolteachers, firefighters and other middle-income workers.

This is not the only trick that the Social Security cutters are playing these days. One proposal from both Bowles-Simpson and CAP is to change the annual cost of living adjustment (COLA) for retirees. They propose using an alternative index for the COLA that they claim is more "accurate."

The reality is that these people have no clue whether their preferred index is more accurate in measuring the rate of inflation experienced by retirees. Their index was not designed for this purpose. What they do know is that their index provides a lower COLA leading to lower benefits. After 10 years the COLA provided by their index will have reduced the benefits for a retiree by roughly 3.0 percent. After 20 years, the decline would be 6.0 percent. This would be a substantial cut in income for many people who are entirely dependent on their Social Security and just getting by now.

If accuracy is the issue, rather than cutting benefits, we could ask the Bureau of Labor Statistics to design a price index that specifically measures the rate of inflation experienced by the elderly. There is little interest in Washington in this exercise because the evidence we have now indicates an elderly index would lead to a higher COLA, not a lower one. So, in the interest of accuracy, let's be clear: The Social Security cutters want to see a lower COLA for Social Security beneficiaries. They do not give a damn about having an accurate one.

The Washington insiders may not be very honest in their efforts to cut Social Security, but they deserve some sympathy. After all, on policy grounds they have no case.

Social Security is an incredibly effective program. It provides a core retirement income to tens of millions of people, while insuring almost the entire workforce against disability or early death. And, it does this at an administrative cost that is about one-tenth as high as private insurers charge. In addition, it is fully solvent long into the future.

They have an even harder time with the politics. Social Security is enormously popular across the political spectrum from the left-wing of the Democratic Party to the devout Tea Party faithful.

In short, those who want to cut Social Security must overcome the fact that they have no argument on policy grounds and their scheme faces enormous political opposition. As a result, the Washington insiders have no choice. If they want to cut Social Security they will have to lie, cheat and steal. And the Washington insiders are very good at these tactics.

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