Deficit Commission's Rumored Deal

http://www.huffingtonpost.com/rj-eskow/deficit-commissions-rumor_b_710612.html

Richard (RJ) Eskow.Consultant, Writer, Senior Fellow with The Campaign for America's Future
September 9, 2010
Deficit Commission's Rumored Deal Would Pit Middle-Class Seniors Against the Poor

If back-channel sources are correct, the Deficit Commission is finalizing a deal that would increase Social Security benefits slightly for low-income recipients while cutting them for everyone else. The Commissioners apparently believe that putting this "progressive" gloss on a package of unneeded cuts would allow them to move forward with their predetermined anti-Social Security agenda.

The new proposal would pit middle-class seniors against the elderly poor, forcing them to compete for a stripped-down pool of dollars. The end result would be the one that many Commission members have pursued for years: to cut the most stable and successful program in the Federal government's history.

Accounts of this pending deal come from the top-secret, behind-a-firewall, inside-the-Cone-of-Silence proceedings of the Commission itself, which is why they can't be officially confirmed. (Remind me again: Why are such critical issues being debated in secret, only to be presented to Congress for ratification after the November elections?) But if these reports are correct -- and there is good reason to believe they are -- some members of the Commission presumably believe this strategy would confuse and divide the many Americans who oppose Social Security cuts, while defusing the growing resistance to their actions among progressive members of Congress.

The Commissioners have clearly been stung by the nickname bloggers have given them: the "Catfood Commission." This recommendation would take the edge off that name, since they could now claim they've made sure nobody will be eating Purina Old Folks' Chow as a result of their actions. It would also give them chance to bait their opponents: Don't you care about poor people? But there are a number of problems with their proposal, and there are fairer and more cost-effective ways to help impoverished seniors. Here's what this new proposal gets wrong.

They're misreading the public: First, progressives aren't the only ones opposed to cutting Social Security. Recent polling by the Celinda Lake organization showed that seven out of ten voters opposed cutting benefits for people earning over $30,000 in order to reduce the deficit. 76% of independents oppose cutting Social Security to reduce the deficit, as do 77% of Republicans -- and 76% of Tea Party supporters! Putting an antipoverty gloss on overall cuts won't impress these voters. Nuanced arguments -- "we're cutting the program to save it" or "we're not reducing the deficit, we're stabilizing the program" -- will be lost on angry voters with finely-tune BS detectors who have contributed to the program for years.

It's a broken promise: This policy would violate a compact the United States government made to generations of its citizens: Pay into the system and you'll receive what's been promised in the end. Social Security is a self-funded system that provides some income security during old age or disability. Using employee and employer contributions to reduce poverty would be a redirection of the money that working Americans and their employers paid to help them when they're disabled or retired. If the Commissioners have a new antipoverty mission, there are better ways to pay for that.

There aren't enough "rich" beneficiaries: The Commissioners will no doubt make the argument that Warren Buffett and others in his income shouldn't receive the same benefit income as somebody who's struggling to make ends meet. But there aren't enough Warren Buffetts in the system to make a difference. Since Social Security benefits are capped at a relatively low level, Warren Buffett isn't likely to receive any more in benefits than someone who earned less than $100,000 per year.

If benefits are going to be tied to overall income and wealth in the future, cuts will have to reach deep into the middle-class in order to make any real difference -- especially if there's a slight benefit increase at the low end. The number of Social Security recipients who are still impoverished (from 2000-2002 data) is 1. million, or 8.7% of the elderly. Since Social Security currently keeps 13 million seniors out of poverty, that leaves a lot of stable or increased benefits that would have to be offset by by reducing benefits for middle-class recipients in order to cut overall costs.

Benefit redutions will have to be deep, wide, and painful. This new proposal bears some resemblance to "progressive price indexing," a Republican proposal that would have left benefits intact for recipients with the lowest incomes while progressively reducing them for everyone else. Unfortunately, a 2005 paper by Jason Furman (now the White House's Deputy Director of the Economic Council) showed that this approach would cut benefits for today's average 25 year worker by 16% if he or she retires in 2045, and would result in a 28% for the average worker retiring in 2075. Any other approach the Commission takes will come up against the same challenge: If you're not willing to raise revenues by lifting the payroll cap, you'll need to make deep benefit cuts for the middle class. (And if you are willing to lift that cap, benefit cuts are unnecessary.)

It will cut a needed lifeline for seniors living on modest incomes.Those cuts would hurt a lot of people. Social Security benefits represent 40% of seniors' income, on average and that figure'ss bound to rise as corporations continue to cut back on employee pension plans. The median income for Social Security recipients in 2008 was $18,001. Cuts would affect people whose average incomes are somewhat higher, but most of them certainly won't be wealthy. The demographics and income statistics show that Commission can't make a meaningful dent in the overall numbers without cutting benefits for people with modest incomes. (Figures are from the Employee Benefits Research Institute.)

Administrative costs would offset a lot of their expected savings. Current administrative costs amount to less than 1 percent of benefits, a figure that's extremely low when compared to other programs. While linking benefits to income or other assets may sound like a good idea, it will add enormously to the administrative costs. It's not just a matter of cross-referencing the Social Security system to the IRS databases -- although that's a lot bigger undertaking than it sounds. Any needs-based system will require appeals processes, exceptions for certain mitigating circumstances, and other provisions that will be labor-intensive to administer. Part of the beauty of the current Social Security system -- and one of the keys to its success -- is its simplicity. That would be lost under this proposal.

Fortunately, there's a solution:

Lifting the payroll tax cap is fairer and more efficient. The administratively simple, cost-effective approach to Social Security's minor long-term funding problem is to raise the payroll tax cap from its current $106,000 level. Systems are already in place to handle that change (at the IRS and in automated payroll systems for employers). That would address the long-term funding issues for Social Security itself, cleanly and efficiently. What's more, that move (perhaps supplemented by a relatively modest payroll tax increase for very high earners) could also help fortify benefits those low-income recipients. A progressive adjustment to the payroll tax would provide for the needs of that 8.7% still in poverty more cost-effectively and more fairly than this plan would.

In other words, the Commission's new goal can be more efficiently and fairly funded by a marginal increase in taxes for the wealthiest Americans. If Commissioners lack the political will to make this kind of antipoverty commitment on behalf of the well-to-do -- and with the preponderance of conservatives and millionaires on the Commission, that's likely -- why are they asking middle-class seniors with an average total income of $18,000 to carry that burden instead?

If this were a public debate and not a secret one, this latest move could be used to start the debate we should be having: Why don't we strengthen and increase Social Security, rather than cut it?

Of course, the minor adjustments needed to stabilize Social Security for a century aren't the only issue. Many Commissioners want the Federal government to keep the $2.5 trillion it borrowed from Social Security's trust fund (and therefore from working Americans and their employers) so they can continue to use it for other purposes. That would amount to a regressive tax on the middle class.

Overall, this new proposal is simply a smokescreen for overall benefit cuts, camouflaged by a small social mission subsidized by a hidden tax on the middle class. It's a political trick. Commissioners like Alan Simpson can now claim to be working on behalf of the "lesser people," to use his preferred choice of words, defending them against "greedy geezers" whose desire to collect the benefits they've subsidized is selfish and uncaring. That may sound like smart divide-and-conquer politics to the Commission, but it won't play as well on Main Street as it will on Wall Street.

There are ways to help impoverished seniors that don't involve cutting Social Security benefits or forcing more sacrifices onto the middle class in order to protect the well-to-do. The Deficit Commission shouldn't use impoverished seniors as hostages in order to finish what many of them have been trying to do for decades: cut Social Security.

Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Strengthen Social Security campaign. Richard also blogs at A Night Light.

He can be reached at rjeskow@ourfuture.org.