Kennedy's Quick Win for Social Security

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Dean Baker
Talking Points Memo, August 26, 2009

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I first met Ted Kennedy in the fall of 1995. The context was truly bizarre.

Alan Greenspan had testified to the Senate Finance Committee in the fall of 1994 that the Consumer Price Index (CPI) overstated the true rate of inflation. He told the committee that if it lowered the annual cost of living adjustment (COLA) for Social Security to correspond to the true rate of inflation, rather than the CPI, it could largely eliminate the budget deficit.

Greenspan told the committee that the gap was between 1-2 percentage points annually, so that after a decade, his plan would cut annual Social Security payments by more than 10 percent. And the great thing was that Congress could do this cut by claiming it was just a technical adjustment.

Over the next half year, the idea of changing the COLA for Social Security gained considerable support in Congress from both parties. (Daniel Moynihan was the strongest proponent.) There was also support for the idea in the Clinton White House.

In this context, I was invited to talk to Senator Kennedy and his staff about the CPI, since I was one of the few economists who disputed the claim that the CPI overstated inflation. I was very happy when I got to his office to see five senior-looking staffers. I assumed that these were the people that I really had to convince and I focused my attention on them, only occasionally looking back at Kennedy to avoid appearing rude.

After about 10 minutes of boring econ jargon (price indices are even boring to economists), Senator Kennedy started asking me probing questions. It was clear that he had listened carefully and understood everything I said. I then began to focus my attention directly on Kennedy and we had a very good discussion of the issues. I walked away with a very valuable ally in this fight.

I saw exactly how valuable about a month later. The scene was a meeting of an ad hoc House-Senate Democratic committee that had been established to help hammer out a balanced budget proposal that Congressional Democrats could sign onto. This was the period when the government was shut down, as President Clinton and the Republican-controlled Congress could not agree on a budget.

The congressional Democrats felt that it was important that they have their own budget to establish themselves as an independent force in the debate. The ad hoc committee was supposed to focus on the issues of the CPI adjustment and corporate welfare. The CPI adjustment was being debated because there were many Democratic members of Congress who found it an attractive way to achieve deficit reduction.

Senator Kennedy invited me to this committee meeting so that I could speak about the accuracy of the CPI. I met with him and his staff before the committee meeting. He explained that his goal was to keep corporate welfare on the agenda and the CPI adjustment off the agenda. He said that he wasn't sure that he could succeed, but that was his plan.

The corporate welfare discussion came first. Senator Kennedy framed the issue. He noted hundreds of billions of dollars in tax breaks and subsidies that could be identified as corporate welfare. He said that the Democrats should set a target of reducing corporate welfare by some substantial amount as a major part of their program for a balanced budget.

Kennedy then shut up. He let the rest of the group spout off about all sorts of related and unrelated topics, only briefly intervening at a couple of points to keep the conversation moving forward. At the end of the discussion, corporate welfare was on the agenda.

Then we got to the CPI. He briefly, but accurately, laid out the case that the claims for an overstated CPI were weak. He then introduced me as an expert on the CPI and invited me to say a few words to the committee.

The ensuing discussion again went all over the place with Kennedy largely remaining silent. However, at the end of the debate, the CPI adjustment was off the table.

I was tremendously impressed. Kennedy had gotten exactly what he wanted on both issues and he never broke a sweat. He framed the debate and just let things run their course. It was truly masterful.

From the standpoint of the policy involved, although the details are incredibly obscure, the impact would have been very visible and quite large. If the CPI adjustment had taken effect, someone who had been receiving Social Security in 1996 would be getting about 13 percent less in their monthly check today (a cut of roughly 1 percent a year for 13 years). That would be a very painful cut for a segment of the population that doesn't have much money to spare.

If the Democrats in the Congress had joined the chorus of those pushing for a CPI adjustment, it is very likely that it would have gone through. So, even though almost no one knows the details of this particular incident, Senator Kennedy played an enormously important role in protecting the financial security of tens of millions of current and future retirees.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.