Cutting Social Security and Not Taxing Wall Street
By Dean Baker, from the Huffington Post
New York City Stock Exchange
As we move toward the fifth anniversary of the great financial crisis of 2008, people should be outraged that cutting Social Security is now on the national agenda, while taxing Wall Street is not. After all, if we take at face value the claims made back in 2008 by Fed Chairman Ben Bernanke and former Treasury Secretaries Henry Paulson and Timothy Geithner, Wall Street excesses brought the economy to the brink of collapse.
But now the Wall Street behemoths are bigger than ever and President Obama is looking to cut the Social Security benefits of retirees. That will teach the Wall Street boys to be more responsible in the future.
Most people are now familiar with President’s Obama’s proposal to cut Social Security by reducing the annual cost-of-living adjustment (COLA). While the final formula is somewhat convoluted, the net effect is to reduce benefits by an average of roughly 3.0 percent.
Since Social Security benefits account for more than 70 percent of the income of a typical retiree, this cut is more than a 2.0 percent reduction in income. By comparison, a wealthy couple earning $500,000 a year would see a hit to their after-tax income of just 0.6 percent from the tax increase that President Obama put in place last year.
While President Obama is willing to make seniors pay a price for the economic crisis, his administration is unwilling to impose any burdens on Wall Street. Specifically, it has consistently opposed a Wall Street speculation tax: effectively a sales tax on trades of stock and derivatives. The Obama administration has even used its power to try to block efforts by European countries to impose their own taxes on financial speculation.
If the idea of taxing stock trades sounds strange, it shouldn’t. The United States used to impose a tax of 0.04 percent until Wall Street lobbied to eliminate it in the mid-1960s. Many countries, including the United Kingdom, Switzerland, China, and India already impose taxes on stock trades.
The tax in the UK is 0.5 percent on stock trades (0.25 percent for both the buyer and the seller). It dates back more than three centuries. The country raises more than 0.2 percent of GDP ($32 billion in the United States) from the tax each year. The tax has not prevented the London stock exchange from being one of the largest in the world.
There are currently two bills in Congress for a similar tax in the United States. A bill by Minnesota Representative Keith Ellison would impose the same tax as the UK on stock trades and would apply a scaled rate to options, futures, credit default swaps and other derivative instruments. It could raise more than $150 billion annually or more than $2 trillion over the ten year budget window.
A second bill has been put forward by Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio. This bill would apply a 0.03 percent tax to trades of stock and a wide range of other financial assets. According to the Joint Tax Committee, the bill would raise close to $40 billion a year or over $400 billion over a ten-year budget window once it is implemented.
Unfortunately the administration has consistently opposed both bills. It claims that it is concerned about the incidence of these taxes — that ordinary investors would see large burdens from the tax. It also claims to be worried that the taxes will disrupt financial markets by making trading more costly.
Neither of these stories passes the laugh test. Ordinary investors don’t trade much, and therefore are not going to feel much impact from the tax. If someone with $100,000 in a 401(k) (this is much larger than the typical 401(k)) turns it over at the rate of 50 percent annually, they would pay $15.00 each year as a result of the Harkin-DeFazio tax.
Furthermore research shows that investors reduce their trading as costs increase. This means that if the tax increases trading costs by 20 percent, then investors will reduce their trading by roughly the same amount (in this example, turnover would fall to 40 percent annually). That means that the net cost of turnover in a 401(k) will barely change for a typical investor as a result of the tax. Wall Street would just see much less business.
So the Obama administration wants us to believe that it is willing to cut the Social Security benefits of retiree living on $15,000 a year in Social Security by $450 but it opposes a Wall Street speculation tax because it is concerned that investors with $100,000 in a 401(k) may pay a few dollars a year in additional trading costs. Only a reporter with the Washington Post would believe a story like that.
The other part of the Obama administration’s story is equally laughable. The cost of financial transactions has plummeted in the last four decades because of computers. Even the Ellison tax rate would just raise costs back to their mid-’80s level. The Harkin-DeFazio tax rate would probably still leave costs lower than they were in 2000.
The country certainly had a vibrant capital market and stock exchange in the 1980s, taking costs part of the way back to this level will not prevent Wall Street from serving its proper role of transferring capital from savers to borrowers. It will just clamp down on speculation.
The basic story is very simple. Wall Street bankers have a lot more political power than old and disabled people who depend on Social Security. That is why President Obama is working to protect the former and cut benefits for the latter.
From Sitka News:
U.S. Senator Mark Begich (D-Alaska)
U.S. Senator Mark Begich (D-AK) introduced his three-point plan to strengthen Social Security today at a roundtable discussion with Alaska organizations that are likely to feel the effects of President Obama’s recent budget proposal to cut Social Security benefits.
“There are responsible ways to cut the budget without hurting our seniors,” said Sen. Begich. “While I agree that we need to make major cuts to reduce the deficit, let’s be clear – Social Security is not the problem.”
In response to the president’s proposal, Begich outlined his own plan to make sure Social Security remains viable and robust for decades. Key elements of the plan include:
- Replace the current system for calculating cost-of-living adjustments to more accurately reflect the cost-of-living for seniors. This would replace the consumer price index (CPI) for workers with a CPI-E, which reflects costs for seniors and would increase their benefits.
- Lift the cap on high-income contributions. Current law sets a cap on contributions for higher income earners; this year they quit paying when their wages hit $113,700. By phasing out this cap, which has essentially become a tax loophole, more people would pay into Social Security all year long. As a result, the solvency of the trust fund would be extended for about 75 years.
- Repeal provisions that unfairly penalize workers. The Windfall Elimination Provision and Government Pension Offset formulas currently used to calculate Social Security benefits penalize workers, especially many of Alaska’s public employees, who contributed to Social Security in past jobs but retire under other “non-covered” government pensions. This currently affects 10,200 Alaskans and can reduce their Social Security benefits by more than a half. Senator Begich proposes to repeal the provision in the Social Security Fairness of Act of 2013, which he will introduce next week.
“The future of Social Security is a huge concern for many Alaskans,” said Begich. “The plan I outlined today will ensure that Social Security is available for Alaskans and their children for the next 75 years.”
Begich also said he can’t support the so-called “chained CPI” proposal outlined in the President’s FY 2014 budget and championed in the past by many Republican lawmakers. Most chained CPI proposals hit low-income seniors and disabled Americans especially hard, he said.
Invitees to the roundtable included representatives from the American Association for Retired People (AARP), American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), and National Education Association – Alaska (NEA-Alaska) who discussed the merits of the proposal during an hour-long discussion at Steller Alternative School.
Chained CPI a gimmick we’ll all pay for
Via USA Today, by Duncan Black:
The switch to chained CPI wouldn’t just reduce benefits, including Social Security and Veterans’ benefits, but could also impact future federal tax rates paid by most people.
Various news reports have stated that the Obama administration plans to include cuts to Social Security benefits in its budget proposal. What is less frequently communicated is that such cuts would likely be accompanied by tax increases on the middle class, in violation of one of President Obama’s campaign promises to not increase taxes on those earning under $250,000 per year. These cuts would also impact retirement and disability benefits for veterans.
Many commentators and pundits will described the tax increases and cuts to Social Security and other benefits as a “tweak,” or “technical change,” an “adjustment” or, slightly more honestly, a “gimmick.” This is because the reported proposal will involve changing the calculation of the annual cost of living increase, one measure of inflation, by switching to a new formula known as “chained CPI” (chained Consumer Price Index). Supporters argue that this is simply a more accurate way to calculate changes in the cost of living over time.
It might be, but even if it is a more accurate measurement of cost of living changes for the population overall, there’s no reason to believe that it is a more accurate measurement of those changes for the elderly, the primary recipients of Social Security benefits. Advocates of using chained CPI who claim that their support for it is due to its increased accuracy should also support the construction of a well-researched index specific to the population of retirees. Unsurprisingly, they generally do not, as their interest is in finding a way to cut benefits without anybody noticing. Supposed accuracy is just an excuse, not the real reason.
Perhaps as importantly, the switch to chained CPI wouldn’t just reduce benefits, including Social Security and Veterans’ benefits, but would also impact future federal tax rates paid by most people. Under current law, tax brackets are indexed to the CPI, meaning that a switch to chained CPI could cause those brackets to increase more slowly. People whose incomes are increasing would face higher tax rates more quickly than under current law.
However politicians might wish to hide these facts, a benefit cut is a benefit cut and a tax increase is a tax increase. Personally, I’m in favor of future tax increases when unemployment has fallen farther and contractionary fiscal policies would be less likely to harm the economy, but I’m not in favor of tax increases which fall heavily on the middle class. Any contractionary policy is madness right now, given the weak economy, and increasing the tax burden on the middle class is madness in a time when the 1% are doing so well relative to everybody else.
Cutting promised Social Security benefits is also madness at a time when we’re facing a severe retirement savings crisis. Contrary to popular belief — at least among those who are not current recipients — promised Social Security retirement benefits are already not very generous, with median monthly retiree payouts equal to about$1230. Most people nearing retirement age lack the necessary savings to maintain their pre-retirement lifestyles, as they lack defined benefit pensions and the 401(k) system has generally failed to provide for them adequately.
Right now the focus should be on increasing benefits, both for retirees and for veterans, some of whom have sacrificed more than most of us can comprehend, not cutting them. They all deserve a future of dignity and economic security, not deprivation and fear. And increasing taxes on the middle class is unfair and counter to the promises made during the election campaign.
One can refer to the potential switch to chained CPI as a kind of gimmick, but it’s a gimmick which will result in increased economic hardship for most of us. It is a gimmick which raises tax and reduces promised benefits. It is a gimmick we should all reject.
Duncan Black writes the blog Eschaton under the pseudonym of Atrios and is a fellow at Media Matters for America. He holds a doctorate in economics.
The truth about the ‘chained CPI’ and Social Security
By Michael Hiltzik, from the Los Angeles Times
Sen. Bernie Sanders of Vermont introduces a bill to strengthen Social Security. (Chip Somodevilla / Getty Images / March 7, 2013)
It’s a benefit cut. It’s not merely a “technical” change. It’s not a “more accurate” measure of inflation.
The “chained CPI” has become one of the linchpins of the debate in Washington over what to do about the cost of Social Security. The idea is to ratchet back the annual cost-of-living adjustment provided to recipients by basing them no longer on the standard consumer price index, but this new creature. Its virtue, supposedly, is that it points to a slower inflation rate than the unchained index, by about .3% a year.
But as I wrote in 2011, it’s a stealth benefit cut for seniors. After 10 years, the average Social Security retiree will be getting 3% a year less than under current law; after 20 years it’s 6%. The change is presumed to be almost painless–who would notice a lower cost-of-living adjustment that amounts to three-tenths of one percent. So the proposal has garnered the favor of Democrats in Congress and President Obama, who seem to think they can offer it as a concession to Republicans and get something good in exchange, like a tax increase.
But as economist Dean Baker has observed, that’s a bigger change than the income tax increase levied on the wealthy in the recent budget deal–and Washington thought that was significant enough to battle over it for years.
In recent weeks a white paper endorsing the “chained CPI” has been landing on lawmakers’ desks. “Measuring Up: The Case for the Chained CPI” was produced by an outfit linked to Peter G. Peterson, the hedge fund billionaire whose hostility to Social Security and Medicare is a byword in Washington.
The paper makes a lot of questionable claims. It’s based on the assumption that the “chained CPI” is a “more accurate” measure of inflation, which is only fair. But there are no grounds for that claim.
The “chained CPI” works by incorporating “substitution” into the inflation measure. The idea is that if one thing you buy goes up in price, you’ll buy less of it and more of something similar that hasn’t gone up as much. So your cost of living won’t rise as fast as the straight price increases in the 200 categories of goods and services measured by the CPI. Gala apples shooting up in price? You’ll buy Fujis instead.
A few problems with this: First, the regular CPI already incorporates this sort of substitution. The “chained CPI” looks at more dramatic changes in purchasing patterns–as Social Security’s chief actuary, Steve Goss, observed at a recent event sponsored by the AARP, it’s more like if cars get more expensive, do you put your money into a flat-screen TV instead?
Another problem is that there’s no evidence that seniors make these sorts of changes in their lives. If they don’t, then the regular CPI understates the inflation they face, and the “chained CPI” is even worse. Indeed, the Bureau of Labor Statistics has been experimenting with a price index designed to more closely reflect the purchases of the average senior by overweighting medical and housing expenses; it rises at about .2% faster than the CPI.
Finally, is the “chained CPI” “more accurate”? The only answer is “more accurate for what?” Any CPI version measures only what’s within the index. The “chained CPI” might measure what happens among people who make the substitutions it defines, but for people not making those choices, it’s less accurate. And since the behavior it purports to incorporate is speculative anyway, there’s no way of saying that it’s more accurate at measuring inflation in the real world, or for any particular community of Americans.
Let’s face it. The “chained CPI” is a benefit cut, dressed up in the faux-finery of economic rigor. Can’t Washington be even a teensy bit honest about what it’s up to?
From Washington Policy Watch:
Second President of the United States John Adams lived to age 90, longer than all but two U.S. Presidents.
In 1983, the so-called “Reagan Reforms” made some big changes to Social Security including eliminating the survivors benefits for college students, boosting the payroll tax, and raising the retirement age from 65 to 67. As a result, anyone born after 1960 must now wait until age 67 to receive their full Social Security retirement benefits.
But now some conservative thought-leaders and wealthy CEOs are again championing lifting the retirement age, this time to 70. Their argument probably sounds familiar to anyone who remembers the 1983 reforms: as people live longer, the retirement age should adjust upward. It sounds reasonable to people who have white collar jobs working in air-conditioned offices – but for millions of working Americans, the reality is much different.
One of the most common arguments in favor of raising the retirement age is that average life expectancy has shot up since the inception of Social Security, from age 60 in 1930 to nearly 79 today. Don’t be misled. The change in overall life expectancy mostly reflects lower infant mortality, not longer lifespans for adults.
In 1939, infant mortality rates were extremely high, but once age 65 the average American could expect to live another 13.4 years, or to age 78. Today, better health care and fewer infant deaths means overall life expectancy has gone up. But life expectancy after age 65 – a more accurate way to predict how long people are really living in retirement – hasn’t changed nearly as much.
As of 2008, the average American who makes it to age 65 could expect to live 19.6 years. That’s just 6 years longer than in 1939, and less than 2 years longer than in 1979 – and even that number overgeneralizes, because it ignores other factors that affect life expectancy, including gender, race, and income. A Social Security Administration study found income inequality plays a big role in life expectancy. For workers in the top half of the earnings distribution, average life expectancy is 86.5, but for those in the bottom half it’s just 81 — a gap of more than 5 years that continues to grow.
Race is another important factor for life expectancy at age 65. The most recent data show black men reaching age 65 have an average life expectancy of just 81, three and-a-half years less than the average for the total U.S. population. Total life expectancy for African Americans is 74.5, while it is 78.8 for white Americans.
American workers that are living longer are, on average, better educated, more affluent, and white. Further raising the retirement age will undoubtedly have a profoundly negative impact on millions of Americans, primarily those with less education, lower earnings, and racial minorities.
Same-sex couples denied Social Security benefits
From CBS 6
NEW YORK (CNNMoney) — Many same-sex couples are losing out on thousands of dollars a year in Social Security benefits because the federal government doesn’t recognize gay marriage, a new report finds.
When a partner dies, the surviving spouse in a same-sex couple isn’t eligible for the average $1,184 in monthly survivor’s benefits that widow’s from opposite-sex couples receive, a report published Tuesday by the Human Rights Campaign and the National Committee to Preserve Social Security & Medicare Foundation said.
Same-sex couples also don’t qualify for the one-time payment of $255 that the Social Security Administration gives to surviving spouses to help with expenses like burials either.
Even while both partners are alive, a lower-earning spouse in a same-sex couple can’t opt to receive Social Security disability or retirement benefits of up to half of a spouse’s benefits (if that amount is larger than what they would get based on their own income) like opposite-sex couples can. That results in an average loss of $675 per month — or $8,100 per year in benefit payments.
Children of same-sex couples are denied Social Security benefits in some cases, too. Depending on their age, children are typically eligible to receive a portion of the Social Security benefits of a deceased, retired or disabled parent — but only if that parent has legal parental rights.
Many same-sex couples adopt children, or one spouse will give birth to a child and the other will become their legal parent through a second parent adoption. But because second parent adoptions aren’t allowed in every state, some people aren’t able to become the legal parents.
If a deceased spouse isn’t legally a parent at the time of death, the child doesn’t receive any benefits, resulting in an annual loss of $9,420 in child survivors benefits for the average family, the report found. And if an unrecognized parent becomes disabled, the annual loss would be nearly $4,000.
To help even out the playing field, The Human Rights Campaign and the National Committee to Preserve Social Security & Medicare Foundation are urging Congress to amend the Social Security Act so that same-sex couples are granted spousal benefits. The groups are also calling for a repeal of the Defense of Marriage Act, the 1996 law that defines marriage as solely between a man and a woman.
The Supreme Court is slated to rule on the constitutionality of DOMA this summer, and the Obama Administration voiced its opposition to the law last week.
“This is a matter of simple fairness,” the groups stated in the report. “Lesbian, gay, bisexual, and transgender people are vital members of the American workforce and contribute their equal share to the social security system with every paycheck. Now is the time to ensure equal access to benefits.”
VIDEO: Social Security forum in Tacoma featuring Dean Baker
If you weren’t able to attend the Social Security forum in Tacoma on February 20th, watch this short video about how we can address the long-term issues facing Social Security in a way that protects and improves our already great Social Security system. Featuring CEPR Co-director Dean Baker, EOI Policy Director Marilyn Watkins, and others.
Video edited by Kathy Cumming at the Washington State Labor Council
