Playing politics with Social Security

October 19, 2009

By John M. Berry

The White House’s knee-jerk reaction to the news that inflation was so low that Social Security beneficiaries won’t get a cost-of-living increase next year was a seriously bad omen for long-term control of federal spending.

The problem wasn’t the $13 billion cost of another one-time $250 payment to each retiree proposed by President Barack Obama. No, it was the utter disregard of the discipline inherent in indexing payments to changes in consumer prices.

Benefits were indexed in the 1970s precisely to stop politicians eager to curry political favor by providing large benefit increases on an ad hoc basis.

Shoveling out more checks to an important group of voters when the economy is as depressed as it is now would be a popular thing to do. Plenty of Democrats — as well as many of the Republicans who have been clamoring about soaring budget deficits — quickly endorsed the $250 payment even though prices weren’t just flat, they fell by 2 percent.

You can make an argument that even if the economy has begun to grow again — and there are unmistakable signs it has — another dose of fiscal stimulus may be needed to insure the recovery will be strong enough to generate the needed millions of new jobs. But earlier this year each Social Security beneficiary got a $250 check as part of the big stimulus package.

Most of all, it would be a serious mistake to set a precedent of encouraging beneficiaries to believe they’ll get a benefit increase each year no matter what.

The idea floated by the White House is completely at odds with several other laudable efforts by Obama to strike a new note of disciplinary honesty in the fiscal 2010 budget.

For instance, Obama proposed indexing the income thresholds at which the alternative minimum tax hits taxpayers rather than continue to let that happen in separate legislation each year.

Everyone knows Congress isn’t ever going to let tens of millions of middle-income households get hit by the AMT. But passing a “fix” each year makes future budget deficits look smaller because under the “current law” assumption in budget accounting, that phantom revenue gets counted. That lowers projections of future deficits.

Congress rejected that bit of honesty in this year’s budget resolution.

Similarly, Obama’s budget noted that while natural disasters, such as floods and droughts, are unpredictable, they occur more or less continuously, and Congress responds each year by appropriating money for politically popular disaster relief programs. So the president proposed acknowledging that reality by budgeting several billion dollars to recognize those facts.

Again, that would make future deficits look bigger on paper, so Congress wouldn’t allow that either.

When Social Security benefits were first indexed, there was not supposed to be a COLA unless the cumulative increase in the CPI was at least 3 percent. That was no issue until 1986 when the price rise was less than 2 percent.

At that point the economy was not in a recession, but following the law was quickly deemed to be unfair and the 3 percent requirement was scuttled. This year prices have declined.

“Social Security is doing its job helping Americans maintain their standard of living,” Michael Astrue, Commissioner of Social Security, said in a statement. “Last year when consumer prices spiked, largely as a result of higher gas prices, beneficiaries received a 5.8 percent COLA, the largest increase since 1982.”

All true, but not good enough in Astrue’s view.

“This year, in light of the human need, we need to support President Obama’s call for us to make another $250 recovery payment for 57 million Americans,” he said.

He didn’t bother to mention that because no COLA is due, the monthly Medicare Part B premium deducted from most beneficiaries’ checks will remain at $96.40 for the second year in a row. The premium is supposed to rise by 15 percent to $110.50 next year, but the deduction can’t go up by more than COLA.

In other words, having no benefit increase will save most beneficiaries $169.20 next year — an amount equal to two-thirds of the proposed $250 payment.

There’s no justification for twisting the good news that inflation is so low that no COLA will be paid into an excuse for ignoring budget discipline.

This year the desperate need for a big dose of fiscal stimulus had to take precedence over concern about immediate deficits. Nevertheless, Obama and his advisers need to be more careful. They can’t blithely brush aside the long-run implications of their budget choices.

3 comments

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I agree that the expectation of an increase in benefits in payment each year needs to be stopped. What is more, consideration should be given to modifying the COLA calculation to ensure that it does not exceed the change in the wage index. If this change is not made, retirees will be receiving more protection than working Americans – a politically untenable situation.

Posted by Robert J Molineaux, Redfield, New York | Report as abusive

[...] John Berry: Playing politics with Social Security The White House’s knee-jerk reaction to the news that inflation was so low that Social Security beneficiaries won’t get a cost-of-living increase next year was a seriously bad omen for long-term control of federal spending. The problem wasn’t the $13 billion cost of another one-time $250 payment to each retiree proposed by President Barack Obama. No, it was the utter disregard of the discipline inherent in indexing payments to changes in consumer prices. Benefits were indexed in the 1970s precisely to stop politicians eager to curry political favor by providing large benefit increases on an ad hoc basis. Shoveling out more checks to an important group of voters when the economy is as depressed as it is now would be a popular thing to do. Plenty of Democrats — as well as many of the Republicans who have been clamoring about soaring budget deficits — quickly endorsed the $250 payment even though prices weren’t just flat, they fell by 2 percent. [...]

Would a stimulus by any other name smell as sweet?

How many s.s. recipients are saving this money? I imagine that most will be pouring it into the economy (on dentures, early bird specials, etc.) and what if we view it as Keynesian spending by another name (with some good old people optics thrown in for good measure so it actually gets voted for)? Might that be a good thing?

the other missing ingredient in the formula for figuring out inflation for these people, is that they more then any other group is impacted by the increasing costs of medical care and prescription drugs. that was the argument in favor of this, to offset that portion of inflationary increase.

Posted by ron sturtevant-stuart | Report as abusive

[...] John Berry: Playing politics with Social Security The White House’s knee-jerk reaction to the news that inflation was so low that Social Security beneficiaries won’t get a cost-of-living increase next year was a seriously bad omen for long-term control of federal spending. The problem wasn’t the $13 billion cost of another one-time $250 payment to each retiree proposed by President Barack Obama. No, it was the utter disregard of the discipline inherent in indexing payments to changes in consumer prices. Benefits were indexed in the 1970s precisely to stop politicians eager to curry political favor by providing large benefit increases on an ad hoc basis. Shoveling out more checks to an important group of voters when the economy is as depressed as it is now would be a popular thing to do. Plenty of Democrats — as well as many of the Republicans who have been clamoring about soaring budget deficits — quickly endorsed the $250 payment even though prices weren’t just flat, they fell by 2 percent. [...]