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Calculating COLA for Social Security Using Chained CPI Would Wipe Out 2012 Increase Print
Written by David Rosnick   
Wednesday, 19 October 2011 14:00

With the release of the September price data, we now know the 2012 cost-of-living adjustment (COLA) for Social Security and Supplemental Security Income benefits. From the third quarter of 2008 to the third quarter of 2011, the Consumer Price Index for Urban Wage Earners (CPI-W) rose 3.6 percent. That means a retiree receiving $1,115 each month would receive an additional $482 in annual benefits in 2012.

Recently, some on the campaign trail and in D.C. have proposed calculating the COLA based on the chained CPI (C-CPI-U) rather than the CPI-W. Proponents argue that the CPI-W overstates inflation, making the switch to the chained CPI a merely technical change.  The purpose of the switch, however, is to reduce benefits.

If this policy were in place today, beneficiaries would receive only a 2.8 percent COLA next year. Compared with current law, a retiree who received $878 per month in 2001 would, in 2012, see his/her annual benefit decrease by $462 (3.3 percent) under the chained CPI. A CEPR report back in September found that these changes would mean a decrease in benefits of 3 percent in 10 years, 6 percent in 20 years and 9 percent after 30 years of retirement. If the COLA had been calculated for the last 11 years using the chained CPI, it would effectively wipe out the 2012 increase.

 
Letter: Legislation by Sen. Hutchison Would Cut Social Security Benefits for Near-Retirees Print
Written by Dean Baker   
Friday, 14 October 2011 15:00

The Honorable Kay Bailey Hutchison
284 Russell Senate Office Building
Washington, DC 20510-4304

Dear Senator Hutchison,

A recent opinion piece you authored argues that we must act immediately to save Social Security. In the column, you suggested a course of action based on the DSSS Act — legislation you introduced earlier this year — in order to avert the 23 percent cut in benefits that would happen in 2036 if nothing is done in the next quarter century and the Social Security Trustees projections prove correct. (The Congressional Budget Office (CBO) projections imply cuts of 18 percent in 2038.) The column also claims that the situation will get much worse after the projected date of depletion. In fact, both the Social Security trustees and CBO projections show that after initial depletion of the trust fund, the picture for payout of benefits actually gets slightly better over the following decades.

Also, you should realize that the cuts implied by DSSS Act are comparable in size to the cuts that would occur after the projected date of depletion if nothing is done. Specifically, the proposed 1.0 percentage point reduction in the annual cost-of-living adjustment translates into roughly a 10 percent cut in lifetime benefits for a person who collects benefits over a 20-year retirement. Raising the retirement age by an additional year amounts to roughly a 6 percent cut.

Taken together these policies would reduce benefits by roughly 16 percent for near-retirees, as opposed to the 18 percent reduction in benefits that CBO projects would occur in 2038 if Congress does nothing. I hope that you are aware of these numbers, but it is difficult to understand how you could view an 18 percent reduction in benefits for workers who will retire a quarter of century in the future to be unacceptable, while advocating a 16 percent cut in benefits for near-retirees.

I recognize your important role in being one of the leaders in the Senate on this issue. If I can provide you with further information or background on the program, I would be happy to do so.

 
Letter: Governor Rick Perry is Wrong on Social Security Means Testing Print
Written by Dean Baker   
Wednesday, 12 October 2011 16:00

The Honorable Rick Perry
Office of the Governor
State Insurance Building
1100 San Jacinto
Austin, TX 78711

Dear Governor Perry,

At a recent campaign stop in Iowa, you said that you are open both to raising the retirement age for Social Security and limiting benefits for upper-income people, or means-test the program. You summed up these suggestions by saying, “With no changes, [Social Security] won’t be there for [younger Americans] when they retire.”

A closer examination of Social Security and how benefits are distributed shows that these statements are not accurate. In fact, Social Security will be there for future generations even with no changes. And means testing the program for affluent beneficiaries would actually be an unnecessary cut in benefits for millions of retirees.  

The facts are straight-forward. The recommendations of the National Commission on Social Security Reform in 1983 led to the growth of a large surplus in Social Security. This surplus was used to buy bonds and now Social Security holds more than $2.6 trillion in government bonds. As a result, the Congressional Budget Office’s projections show that the program will maintain full solvency through the year 2038. Even if Congress never makes any changes to the program, Social Security will be able to pay slightly more than 80 percent of scheduled benefits from then on and will indeed be there for younger Americans.

Also worthy of consideration is that the vast majority of Social Security beneficiaries are lower- to middle- income people. The number of beneficiaries considered affluent is far too small to raise any significant amount of revenue through means testing and in the process, the program’s administrative costs would actually go up.

Social Security has continued to be a topic of debate during this campaign season. I hope you and your staff will have the opportunity to further review the design and finances of the program as you prepare future public statements on the topic. If you would like any additional background on the program, I would be happy to assist you.
 
Letter to Rep. Hastings on Social Security Comments Print
Written by Dean Baker   
Monday, 03 October 2011 15:15

The Honorable Doc Hastings,
1203 Longworth House Office Building
Washington, D.C. 20510

Dear Representative Hastings,

At a recent town hall in your district you said that Social Security needs “significant reform” and, among other things, that people are living longer and that the ratio of workers to beneficiaries has changed.

As a matter of fact, changes have already been made to Social Security. Based on the recommendations of the National Commission on Social Security Reform in 1983, Congress increased the normal retirement age to 67 and Social Security taxes were raised. This was done precisely because the commission recognized that people were living longer and the ratio of workers to beneficiaries was getting smaller. This in turn led to the growth of a large surplus in Social Security. This surplus was used to buy bonds and now Social Security holds more than $2.6 trillion in government bonds.

The result of these changes is that the Congressional Budget Office’s projections show Social Security will maintain full solvency through the year 2038 with no changes to the current system.  Even after 2038, the program will still be able to pay about 80 percent of full benefits from then on.

As a member of Congress, I hope that you will be careful to present the situation more accurately in future statements to your constituency and the general public. If you would like any additional background on the program, I would be happy to assist you.

 
Letter to Rep. Coffman on Social Security Comments Print
Written by Dean Baker   
Thursday, 22 September 2011 14:50

The Honorable Mike Coffman
1222 Longworth House Office Building
United States House of Representatives
Washington, DC 20515

Dear Representative Coffman,

During a recent radio interview, you agreed with Governor Rick Perry’s assertion that Social Security is a “Ponzi Scheme.” This comparison has little basis in fact.

At its most basic level, Ponzi schemes are based upon the deceptive premise that for a small investment, investors will receive enormous returns. The real outcome with such schemes is often no return at all.

This is clearly not the case with Social Security.

Social Security is not based on any deception. You can find all the information you want about the program’s past, current and projected future finances in great detail in the annual Social Security trustees report. You will never find this sort of transparency with a Ponzi scheme.

Social Security has provided substantial benefits for retirees since its inception. Moreover, even if Congress makes no changes at all to the program, the latest CBO projections show that Social Security will remain fully solvent through 2038 and would pay about 80 percent of full scheduled benefits from then on, indefinitely. A program that will continue to provide retirement security for millions of people for years to come hardly fits the description of a Ponzi scheme.

As the discussion over Social Security continues, I hope that you will be careful to present the situation more accurately in future public statements. If you would like any additional background on the program, I would be happy to assist you.

 
Letter to Rep. Ryan: Social Security Is Not a 'Ponzi Scheme' Print
Written by Dean Baker   
Wednesday, 21 September 2011 12:30

The Honorable Paul Ryan
1233 Longworth House Office Building
United States House of Representatives
Washington, DC 20515

Dear Representative Ryan:

During a recent interview on The Laura Ingraham Show, you made a number of remarks about Social Security, among them, characterizing Social Security as a "Ponzi scheme," that would yield a negative rate of return, and saying, “…[Social Security] is not working, it is going bankrupt, and that current seniors will be jeopardized the most by the status quo.” None of these statements are accurate.

Almost no one will get a negative real return on their Social Security taxes. This issue has been researched extensively and assuming a 2 percent real discount rate, even as late as 2030, most new retirees will receive more in benefits than they paid in taxes. There is simply no basis for the claim that beneficiaries will receive negative returns on their taxes as the value of scheduled benefits actually rises in later years since life expectancy, and therefore the expected period of retirement, will continue to increase. The only way we would see negative returns would be if Congress voted to cut benefits.

In fact, if Congress makes no changes at all to the program, the latest CBO projections show that Social Security will remain fully solvent through 2038 and would pay about 80 percent of full scheduled benefits from then on, indefinitely. It is quite difficult to make the case that a system that pays full benefits for the next 27 years is not working or is going bankrupt, let alone claim that it jeopardizes the retirement security of current seniors.

As Chairman of the House Committee on the Budget and charged with making recommendations about our nation’s finances, I hope that you will be careful to present the situation more accurately in future public statements. If you would like any additional background on the program, I would be happy to assist you.

 
Change to Social Security COLA Would Reduce Retirees' Standard of Living Print
Written by CEPR   
Tuesday, 20 September 2011 14:45

A new report from CEPR suggests that changing the indexation formula for Social Security benefits — a cost-cutting suggestion often brought up on the campaign trail and in D.C. — would actually significantly reduce the living standard of retirees. The report, written by Dean Baker and David Rosnick, also points out that Social Security benefits relative to lifetime earnings have already been cut for those retiring this year or in the near future.

The report, “The Impact of Cutting Social Security Cost of Living Adjustments on the Living Standards of the Elderly,” examines the effect of using the chained consumer price index or C-CPI-U as the basis for measuring inflation to calculate cost-of-living adjustments for Social Security benefits. For Social Security beneficiaries, these changes would mean a decrease in benefits of 3 percent in 10 years, 6 percent in 20 years and 9 percent after 30 years of retirement. Since the vast majority of retirees rely on Social Security for the bulk of their retirement income, this cut in the cost-of-living adjustment would imply a substantial reduction in the standard of living of retirees, unless they offset it by saving more during their working years or retiring later in life.

Since it's difficult to predict how workers in future years will adjust their behavior to a cost-of-living adjustment, Dean and David looked at changes to the CPI in the mid and late 1990s and how workers responded to those changes. The report shows that these changes to the CPI meant that 10 years after they went into effect, retirees were receiving a benefit 5 to 7 percent lower than would have been the case without any changes.

 
Two New CEPR Issue Briefs Look at Social Security Funding Print
Written by CEPR   
Wednesday, 14 September 2011 09:30

CEPR has two new issue briefs this month tackling the debate over Social Security, both addressing the argument over the program's funding. Many workers do not know that any annual wages above $106,800 are not taxed by Social Security. In other words, a worker who makes twice the Social Security wage cap – $213,600 per year – pays Social Security tax on only half of his or her earnings, and one who makes just over a million dollars per year pays the tax on only about a tenth. For the paper "Who's Above the Social Security Payroll Tax Cap?" Nicole Woo, Janelle Jones and John Schmitt examined Census Bureau data from the most recently available American Community Survey to determine how raising the Social Security cap – which would make some or all earnings above $106,800 subject to the Social Security tax – would affect workers based on gender, race or ethnicity, age, and state of residence. Raising the cap has gotten some attention as a way to help alleviate Social Security’s long-term budget shortfall. U.S. Senator Bernie Sanders plans to introduce legislation to keep the current cap at $106,800, but to also apply the Social Security payroll tax to earnings over $250,000.

In "The Social Security Benefits of Sitting Senators Revisited," Kris Warner, Alan Barber and Dean Baker updated CEPR's previous paper (incorporating the newest CBO projections) to show the scheduled Social Security benefit for each current member of the Senate. Some politicians – such as Florida Senator Marco Rubio and Governor Rick Perry of Texas – have recently said that Social Security is bankrupt and will not be there for them or their children. This is not an accurate assessment. The latest projections from the Congressional Budget Office (CBO) show that Social Security will remain fully solvent through 2038. Even if Congress makes no further changes to the program, Social Security will be able to pay slightly more than 80 percent of scheduled benefits from 2039 on.

 
Letter to Sen. Chambliss on Social Security Reform Comments Print
Written by Dean Baker   
Thursday, 01 September 2011 13:10

The Honorable Saxby Chambliss
416 Russell Senate Office Building
Washington DC, 20510

Dear Senator Chambliss,

While discussing Social Security at a recent town hall in Carroll County, Georgia, you told the audience:

“It needs to be reformed so it’ll be there for the next generation.”

In actuality, it will be there for your children and grandchildren. The recommendations of the National Commission on Social Security Reform in 1983 led to the growth of a large surplus in Social Security. This surplus was used to buy bonds, and now Social Security holds more than $2.6 trillion in government bonds. As a result, the Congressional Budget Office’s projections show that the program will maintain full solvency through the year 2038.

Even without any changes whatsoever to the program, Social Security will be able to pay slightly more than 80 percent of scheduled benefits from 2039 on. Put another way, if your children — currently in their 30s — were to retire at the age of 67, even after Social Security faces projected partial shortfalls beginning in 2039, they would still receive benefits of $32,911 and $34,904 (both in 2011 dollars) respectively, every year, for the rest of their lives. Clearly Social Security will be there for them and millions of other Americans.

As a member of the Senate’s Special Committee on Aging, tasked in part with oversight of Social Security, I hope you and your staff will take the opportunity to further review the design and finances of the program. If you would like any additional background on Social Security, I would be happy to assist you.

 
Letter to Rep. Hensarling: Social Security is not Bankrupt Print
Written by Dean Baker   
Tuesday, 30 August 2011 17:35

The Honorable Jeb Hensarling
129 Cannon House Office Building
Washington DC 20515

Dear Rep. Hensarling,

During a recent exchange outside of the Lakewood Country Club in Dallas, Texas, you were asked by members of the crowd about Social Security and other social insurance programs. You said:

"I want to change it…. I don't want Social Security to go bankrupt."

As it turns out there is little cause for concern. The recommendations of the National Commission on Social Security Reform in 1983 led to the growth of a large surplus in Social Security. This surplus was used to buy bonds and now Social Security holds more than $2.6 trillion in government bonds. As a result, the Congressional Budget Office’s projections show that the program will maintain full solvency through the year 2038. Even if Congress never makes any changes to the program, Social Security will be able to pay slightly more than 80 percent of scheduled benefits from then on.

If you were to retire at the normal retirement age for a person born in 1957, you would initially get a benefit of $34,802 (in 2011 dollars) per year through 2038 and starting in 2039, a benefit of $27,842 (also in 2011 dollars) each year for the rest of your life. Clearly a program that is projected to pay substantial benefits for decades to come is not in danger of bankruptcy.

Inside the country club, it was reported that you told the Greater East Dallas Chamber of Commerce that the budget crisis is fueled by growth in entitlement spending. In fact, under the law, Social Security can only spend money that came from its designated tax or the interest on the bonds held by its trust fund. It has no legal authority to spend one dime beyond this sum. In that sense it cannot contribute to budget deficits or the national debt.

As a co-chair of the “super committee” tasked with providing the rest of Congress recommendations on the nation’s deficit, I hope you and your staff will have the opportunity to further review the design and finances of the Social Security program. If you would like any additional background on the program, I would be happy to assist you.

 
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