Opinion

Reihan Salam

The ‘grand compromise’ that wasn’t

By Reihan Salam
February 24, 2014

One of President Obama’s defining convictions is that he is the most reasonable man in our nation’s capitol. He seems to view opposition to his agenda as a reflection of intellectual or moral failures (my opponents don’t understand the underlying issues well enough, or their hearts aren’t big enough), or as a product of naked cynicism (my opponents are dishonest, and they will do anything to defeat me). To prove his point, the president will occasionally tout an idea from the other side of the aisle, or rather an idea he imagines to be from the other side of the aisle. And when his political opponents don’t embrace the idea, well, that means that they are acting in bad faith.

So I was delighted by the news that the Obama administration is changing its tune on Social Security in its forthcoming budget proposal. Last year, the president included a Social Security reform compromise in the budget proposal he presented to Congress. This year he has decided not to do so. But the truth is that the president’s Social Security compromise wasn’t a compromise at all. His decision to jettison it is a refreshing change of pace. And while the reforms aren’t officially part of the 2015 budget proposal, they remain relevant because Obama is treating them as a concession he’ll make if Republicans agree to raise taxes.

According to the president and his allies, the White House was only willing to compromise on Social Security, by cutting benefits, if Republicans were willing to give a little too, by agreeing to higher taxes. The problem is that his idea for cutting Social Security benefits is actually pretty bad, and it would also raise taxes. In other words, the president’s offer to the GOP is, “Hey, why don’t you share the blame for this thing that will make Social Security worse for seniors and raise taxes, and in return for my generosity you’ll let me raise taxes even more?” You will be shocked to learn that Republican lawmakers were not thrilled by this idea.

Specifically, the White House called for changing the index used to both calculate cost-of-living adjustments for Social Security payments and set tax brackets in its budget for the 2014 fiscal year. This new method for gauging consumer price inflation (“chained CPI”) is considered more accurate than the federal government’s standard Consumer Price Index (“CPI”). But the appeal of chained CPI is not just that it’s more accurate. It just so happens that chained CPI is expected to yield inflation rates around 0.3 percentage points lower than old-school CPI.

This is where the magic happens. By using chained CPI instead of CPI, Social Security benefits would grow at a somewhat slower rate over time, thus containing the Social Security system’s cost as baby boomers exit the workforce. If the only thing Republicans cared about was cutting Social Security spending, this would make the new index pretty appealing.

Yet many Republicans, believe it or not, also want to protect the economic security of older Americans. And there is a real danger that chained CPI might cause problems for the oldest retirees, who in some cases are decades away from leaving the workforce, when their initial benefit levels were set. In fairness, champions of chained CPI tend to advocate building in some added protection for the oldest of the old, to keep them from falling into poverty.

But as Andrew Biggs, a Social Security expert at the conservative American Enterprise Institute, has argued, it would make far more sense to lower the initial retirement-benefit level to encourage workers right around retirement age to keep working, while actually allowing retirement benefits to grow faster by pegging them to overall wage growth.

Biggs also reminds us that chained CPI would also cause tax brackets to change more slowly, and thus would represent a substantial tax increase for middle-income households over time. If the inflation rate is 1 percent a year but average wages increase at a rate of 2 percent a year, you will hit the dollar amount that puts you in a higher tax bracket faster than you will hit the dollar amount that puts you in a higher income percentile. Over the long run, this “bracket creep” from chained CPI will raise more revenue than Social Security benefit cuts will yield in spending reductions. How is this a compromise again?

There are Social Security reforms that Democrats and Republicans could get behind, at least in theory. Andrew Biggs has proposed cutting or even eliminating the Social Security payroll tax for workers over the age of 62, a step that would reduce payroll tax revenues, but increase other tax revenues as older workers choose to work longer hours and to retire later in life. This tax cut wouldn’t quite be a free lunch, but it would come pretty close. Charles Blahous and Jason Fichtner of the libertarian Mercatus Center have suggested cutting Social Security payroll taxes for households with children, while raising them for households without them, a controversial step that would give low- and middle-income working families a big economic boost.

But as journalist Ezra Klein has observed, presidents are ill-suited to forging legislative compromises. Rather than bring partisans together, they tend to polarize them. Instead of offering pseudo-compromises in his budget proposal, the president should stick to laying out his vision for America’s future, in which higher taxes, higher spending, and more onerous regulations will lead us to the promised land. The Republicans should do a better job of laying out their vision as well. And then, come November, in House and Senate races across the country, voters will decide which vision they prefer.

PHOTOS: U.S. Vice President Joe Biden (L) grabs the arm of House Speaker John Boehner (R-OH) as President Barack Obama delivers his State of the Union address in front of the U.S. Congress, on Capitol Hill in Washington, January 28, 2014. REUTERS/Kevin Lamarque

Senate Minority Leader Mitch McConnell (R-KY) (R) and Senator Lamar Alexander (R-TN) (L) hold a press conference on Capitol Hill in Washington November 21, 2013. REUTERS/Gary Cameron

 

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