We have been told that the savings gained by switching from the Consumer Price Index (CPI) to chained CPI will be used to pay for balancing the federal budget instead of getting that money from tax increases on the upper middle class and very wealthy. I will put into business-like terms why chained CPI, indeed any reduction to Social Security and Medicare/Medicaid, is not only ethically wrong, but also theft and a breach of contract. This argument also applies to veteran's retirement and disability benefits, as well as most tiers of federal income taxes, not just Social Security. I also intend to show how chained CPI will damage the economy and hurt future business growth and profits.
Chained CPI is a modification to the current CPI, the price of a typical shopping basket of consumer goods and services that an average person buys, excluding 'volatile' food and energy prices. There are actually several versions of CPI; when I say “the CPI”, I am referring to CPI-W (urban wage earner), the one most commonly reported. Like most people, I buy food and energy, so I think CPI under-estimates my actual costs.
The CPI is used to adjust Social Security benefits annually. Since CPI reflects the average consumer, while the average Social Security recipient uses somewhat more medical care (which has risen much higher than inflation in general), a CPI-W based increase will barely keep up with a senior citizen's rising medical insurance premiums, never mind all of the other items' price rises. There is a CPI-E for the elderly, but the government does not use it to adjust Social Security because it would cost more money (since it more accurately reflects rising medical costs). The CPI is also used to adjust veteran's retirement and disability benefits, and the cut-off levels of federal marginal income tax rates. When incomes rise with inflation, a CPI-based adjustment keeps federal tax rates level for the same buying power.
Chained CPI cuts CPI back even further, as it assumes that people will substitute 'equivalent' cheaper items when they can no longer afford their preferred items. The major problem is that chained CPI is cumulative- proponents make the unspoken assumption that a person can keep cutting back indefinitely. Chained CPI fails to acknowledge reality that there is a limit to cutting back. In the first year, a person with less money (less buying power) can substitute beef for chicken and the thermostat can go down a few degrees in the winter, but the next year chicken will lose out to beans and rice. A few years later only plain boiled rice will be on the menu and the only heat will come from the stove. The dilapidated house (who can afford repairs?) will eventually be given up for a tiny apartment. At some point, after years of chained CPI, there will not be enough money to pay for adequate food nor medicine, and the old person or veteran will be eating poorly. If she does not die from malnutrition, then will she be evicted from her unheated apartment to live her remaining months in a cardboard box under a bridge? Veterans who have served our country, retired due to age or disability, and depend upon their benefits for survival will be in a similarly bleak situation. The most vulnerable among us will be paying for balancing the deficit created by our politicians. (Does this sound inflammatory? Deliberately so, but try to refute the logic.)
Similarly, for people not yet retired, an artificial lowering of the CPI adjustment via chained CPI means incomes rising exactly with inflation will creep into higher and higher tax brackets without any increase in buying power.
People who have lower incomes cannot live, and so will need to depend more upon government aid or charity. Charity, contrary to popular conservative mythos, has never been enough to provide for the old, the infirm, and the disabled. Tiny Tim in “A Christmas Carol” was going to die, even though his father had a job (a miserable one at the lowest wages, just like today). Besides, it was a work of fiction. If charity had ever provided enough aid, then the government would never have needed to step in! As far as retired and disabled veterans, who else but the government should provide for their needs? The government (our nation, we) used them in health and should provide for them now. Anything less is reprehensible. When (not if) chained CPI cuts off enough of their income for them to live, then they will either have to depend upon the government in other ways... or depend on charity (never enough)... or die. Is this what we want.
Furthermore, people at the lowest economic levels have little to no discretionary income. Most or all of their money has to go to the basics- food, shelter, heat/cooling, clothing. It is well known that they must spend just about all of their money. Cutting back on their income means directly cutting back on their spending, i.e. cutting back on the economy at the most basic levels. Chained CPI “savings” will have a directly negative effect on the economy like no other reduction in government spending. Money spent on military weapons which sit on a shelf is not as effective in increasing the economy as money spent on food or shelter. This is called an economic multiplier- a dollar spent on food generates $1.50 in the economy, while $1 spent on the military results in $0.70. Economic multiplier in better terms. The other, obvious idea that comes to mind is that military bases and multi-billion dollar military weapons programs which the Department of Defense says it does not need should be cut before Social Security. Congress, however, is bowing to local desires over national needs, not to mention the bribes I mean campaign contributions from military contractors. The chained CPI proposal will have a much worse effect on the economy than cutting government spending in other areas.
These are the people who will be negatively affected (harmed) by chained CPI: senior citizens, veterans, and all poor, lower class, middle class, and upper middle class taxpayers. Most richer people who are well above the minimum level for the top tax bracket and or who make their money from investments will not have their income nor their taxes affected by chained CPI. So, back to my main premise. Why is chained CPI or any cutting of Social Security benefits theft and a breach of contract?
First of all, Social Security is not “broke” or “bankrupt”. Ever since Social Security was modified in 1986, it has brought in more money every year than it has paid out in benefits. The excess was “borrowed” by Congress, spent, and replaced with special government bonds earning interest. Yes, Social Security is not broke, it has a “trust fund” and is owed a lot of money. In the business sector, if you are owed money, then you are a creditor with a positive balance sheet. Businesses just do not do this. Hrm, mumble, Enron, mumble, BofA, Countrywide, AIG. Okay, honest businesses which are not rich enough to buy politicians and own entire political parties do not do this. Only when politicians get involved can you be called a deadbeat when you've paid your taxes and have several Trillion dollars in the bank. Politicians want to cut back Social Security, hiding the fact that in many cases those same politicians took money from Social Security for 50 years and now do not want to raise their donor's taxes in order to pay it back.
The promises made when Social Security was “reformed” in 1986 included the idea that higher Social Security taxes would “save” Social Security out to more than 75 years. The money was supposed to go towards Social Security recipients, not just vanish. (Washington D.C. would have looked like a re-enactment of the War of 1812, complete with a torched White House, if politicians had dared to admit they were raising Social Security taxes to steal the money.) It is not possible to force a politician to put all of his or her promises in writing, but what is in writing includes higher Social Security taxes, and speeches & comments in the Congressional Register saying how those taxes were supposed to be used. In any other setting, that would be a verbal contract, at the least, if not a binding written one. At least ethically, we have a breach of contract. Unfortunately, politicians cannot be held to contract law, nor would I even venture to use the word ethics and politician in the same sentence without bitter laughter. But we do have a breach of contract, in a business sense.
Social Security taxes have a cap- this year, it is $113,000. Below that amount, all of your wages from the very first dollar are taxed at 6.25%, and your employer pays a matching 6.25%. Above that amount, there is no more tax. This is known as a regressive tax, hitting the poorest people the hardest. Wages are taxed for Social Security, but personal investment income is not. Again this tax hits the poorest people the hardest and the wealthiest practically not at all.
Second of all, who benefited from the shift of Social Security money into the federal budget? Well, politicians, since they got re-elected. Even that small group of ~400 millionaires does not have enough money to pay back their mistake, so we have to look a little further. Let's look at the policies which resulted from artificially low tax rates, i.e. more federal spending than was supported by federal income and excise taxes alone. Who benefited the most from higher spending and lower tax rates in the period of time since Social Security was last “saved” in 1986?
Corporations are the biggest beneficiaries of government spending, yet they have very low effective tax rates. Look at the government contracts (especially military, like the F-35 Joint Strike fighter, a billion dollar weapon without a mission) which Congressional Representatives and Senators will move heaven and earth to keep in their districts. Look at the low effective tax rates these corporations actually pay, not the official tax rates on the books. When GE pays lower taxes than I do – not lower tax rates, but lower taxes – than I do personally, then something is very wrong with our tax system.
Who else benefited the most from low tax rates? The Congressional Research Service published a report in September 2012 showing that the lower and middle and even the upper middle classes did not benefit from tax cuts. (The report was re-published in December 2012 after Republicans forced it to be pulled because they did not like the results. The report was not wrong- the GOP just didn't like that it exposed their lies.) The economy did not benefit from tax cuts. There were no job gains due to tax cuts. No extra tax revenue came from tax cuts (as anyone who can do math would understand), in fact deficits only got worse. The very wealthiest among us, the top 1% and top 0.1%, were the only ones who gained significantly in income and net worth due to those tax cuts. The GOP's non-stop “cut taxes” mantra since the 1980's has primarily benefited the wealthiest. (The 1980's is the same time frame since the Social Security tax was raised... not coincidentally.) Conversely, this report also implies that no jobs will be lost due to higher taxes. The economy will not suffer from higher taxes on corporations or the already-rich. Indeed, the U.S. economy did very well in the 1950's to 1960's with marginal tax rates as high as 70% to 90%. (The argument that rich people just evaded those taxes, so there is no point in raising the rates is sheer nonsense. Why else would the rich have spent money from 1980 to today paying off politicians to lower their taxes? The entire GOP and Crossroads GPS and the Heritage Foundation are not funded by poor people.) Now who is being asked to pay for these large budget deficits? The people who funded the Social Security trust fund and now need it the most. There is little to no overlap between the people who will be harmed by chained CPI, the elderly and disabled and veterans and yes, even average taxpayers, compared to the corporations and wealthiest people who most benefited from “borrowing” all of that Social Security money. If it is not paid back via higher taxes, then it is no longer borrowing, but outright theft. The people who gained the most should now pay it back in higher taxes, not get a free ride.