Obama Third Fiscal Cliff Offer Includes Cuts to Social Security

Below are several articles with an initial reaction to Obama’s most recent offer on the fiscal cliff.  The repeal of the Bush tax cuts, which would expire if nothing were done, has been weakened as it now applies to people earning over $400,000 rather than $200,000.  Obama put Social Security cuts on the table through changing how inflation is indexed.  This will add to the poverty retirement of America’s elderly.  Further, there will be $400 billion in cuts to Medicare — what will be cut is not made clear.  Obama is suggested a small stimulus of $50 billion.  This is Obama’s offer, surely it will get even worse when the Republicans respond.

Obama’s Latest Fiscal Slope Offer: I’m Missing the Part Where Republicans Give Up Something

ByDavid Dayen
Fire Dog Lake, Tuesday December 18, 2012 6:00 am

I noted the emerging fiscal slope deal yesterday, and we have additional developments on that front.

The headlines here is that the Obama Administration narrowed the demand they maintained for four years, for tax rates to increase above $250,000, and they would agree to a benefit cut for Social Security and $400 billion in unspecified Medicare cuts, and in exchange they would mostly extend current law on a few fronts (but not all) and get an unspecified amount, no more than $50 billion, in infrastructure spending.

Also we’d all be back here in two years with a third debt limit showdown in 2014.

The New York Times has probably the best pure rundown of what the President offered. Let’s bullet-point:

Taxes. “The White House plan would permanently extend Bush-era tax cuts on household incomes below $400,000, meaning that only the top tax bracket, 35 percent, would increase to 39.6 percent. The current cutoff between the top rate and the next highest rate, 33 percent, is $388,350.” This would raise somewhat less than the $800 billion envisioned by allowing the top two tax rates to rise. However, the White House’s revenue offer stands at $1.2 trillion, above that $800 billion number. Where’s the rest coming from? According to Jared Bernstein, the top capital gains and dividend tax rates would rise to 20% above $250,000 in income, and there would be some deduction cap, similar to the 28% rate on deductions above $250,000 that Obama has put in nearly every one of his budgets. But the details there are unclear.

Spending. “The White House says the president’s plan would cut spending by $1.22 trillion over 10 years, compared with $1.2 trillion in cuts from the Republicans’ initial offer. Of that, $800 billion is cuts to programs, and $122 billion comes from adopting a new measure of inflation that slows the growth of government benefits, especially Social Security. The White House is also counting on $290 billion in savings from lower interest costs on a reduced national debt … Of the $800 billion in straight cuts, the president said half would come from federal health care programs; $200 billion from other so-called mandatory programs, like farm price supports, not subject to Congress’s annual spending bills; $100 billion from military spending; and $100 billion from domestic programs under Congress’s annual discretion.”

So you have chained CPI, a benefit cut to Social Security in a time when the program is not adequate enough to prevent 15.1% of all seniors from falling into poverty (I’ll cover this more in a subsequent post). Then you ADD TO THAT $400 billion in health care program cuts. The President’s previous offer has $400 billion in health care savings that did not affect beneficiaries, but these cuts are unspecified. On top of that, this only prevents 80% of the sequester from taking effect. If $100 billion in cuts to discretionary spending and $100 billion to defense remain, that’s 20% of the current sequester. And there’s $200 billion extra in mandatory cuts.

We don’t know how that plays out in terms of back-loading, but it approaches a $100 billion cut, if not more, in 2013. And you can add to that:

Expiring programs. “And Mr. Obama is sticking by his request for additional upfront spending on infrastructure and an extension of expiring unemployment benefits … He would also secure some tax and policy changes long sought by both parties but unattainable in the context of smaller budget deals. His proposal would permanently extend popular business tax breaks like the credit for corporate research and development, permanently stop the expansion of the alternative minimum tax so it does not affect more of the middle class, and stop a long-planned and deep cut to Medicare health providers, which Congress has never had the stomach to allow to kick in.” What’s missing there is the payroll tax cut, which will almost certainly be allowed to expire. That’s another $125 billion in austerity for 2013, for a total of $225 billion in spending cuts and as much as $100 billion in taxes. The fiscal slope contemplated $500-$600 billion in fiscal snap-back in 2013; this deal appears to include HALF OF THAT FISCAL CUTBACK.

But wait! There’s the stimulus mentioned in the previous piece. Upfront spending on infrastructure, along with an extension of expiring unemployment benefits. Unemployment benefits are no more than $30 billion now, since they’ve been whittled from 99 to 73 weeks at most (it’s rather shocking to consider unemployment benefits “stimulus,” rather than what you do when there’s high unemployment). The infrastructure spending is undefined, but maybe you get $50 billion out of it, tops. I seriously doubt it, since that was the Administration’s initial offer. So maybe you get $80 billion (probably more like $60 billion) in stimulus to offset as much as $325 billion in austerity. That’s not going to do the job.

Then there’s the…

Process. “To make all this happen, Mr. Obama proposed fast-track procedures to help Congressional tax writers overhaul the individual and corporate tax code and make changes to other programs.” In other words, Congress would have to run with the details here, including filling in the targeted spending cuts, and complete individual and corporate tax reform. Have you seen Congress work lately? Think they’re up to this task? No? Then you’re probably wondering how this deficit reduction will get secured. Wonder no more! You’ll have ANOTHER SEQUESTER, something that would automatically kick in if Congress failed to get a deal in a prescribed time.

One final thing:

Debt limit: “To keep the country from returning to fiscal showdowns, Mr. Obama wants the government’s borrowing limit to rise high enough to take the issue off the table for two years, although he said that Congress could periodically weigh in and try to override a presidential lifting of the debt ceiling, should it want to.” That doesn’t come close to a permanent solution to debt limit weaponization. Under this deal, the deficit would close in 2013 and 2014, so you’re talking about probably a $1.6 trillion debt limit increase, or something in that neighborhood. And in two years, the gang gets back together – at least everyone left in Congress – to do this all over again. Nobody expects Democrats to carry the House and 60 votes in the Senate, so Republicans can work their leverage again.

From where I’m standing, this is a deal for the President to break his promise on tax rates, allow half of the fiscal slope to go forward, probably cut as much as 2% from GDP in 2013, and enact permanent benefit cuts to Social Security (and other government benefits) as well as unspecified cuts to health care programs, in exchange for…

1. a routine extension of unemployment insurance;
2. no more than $50 billion in infrastructure, probably less;
3. a permanent extension of things Congress does annually like clockwork (making them permanent is good public policy, but doesn’t functionally change much);
the chance to do this again in two years.

Meanwhile, Republicans give up tax rates that were going up anyway, an unemployment extension that they have yet to fail to pass, and a bit of infrastructure. That’s it, in exchange for cuts that will put discretionary spending well below traditional levels, cut Social Security benefits and basically ensure smaller government through caps and cuts.

Sound good?

Thoughts on the Chained CPI, Social Security, and the Budget

By Dean Baker
Center for Economic and Policy Research, December 17, 2012

According to reliable sources, the Obama administration is seriously contemplating a deal under which the annual cost of living adjustment for Social Security benefits would be indexed to the chained consumer price index rather than the CPI for wage and clerical workers (CPI-W) to which it is now indexed. This will lead to a reduction in benefits of approximately 0.3 percentage points annually. This loss would be cumulative through time so that after 10 years the cut would be roughly 3 percent, after 20 years 6 percent, and after 30 years 9 percent. If a typical senior collects benefits for twenty years, then the average reduction in benefits will be roughly 3 percent.

There are a few quick points worth addressing:

– The claim that the chained CPI provides a more accurate measure of the cost of living;

– Whether Social Security benefits are now and will in the future be sufficient to allow for a decent standard of living for retirees; and

– Whether this is a reasonable way to be dealing with concerns over the budget.

This are taken in turn below.

Is the Chained CPI More Accurate?

While many policy types and pundits have claimed that the chained CPI would provide a more accurate measure of the cost of living for seniors, they have no basis for this claim. The chained CPI is ostensibly more accurate for the population as whole because it picks up the effect of consumer substitution as people change from consuming goods that increase rapidly in price to goods with less rapid price increases.

While this is a reasonable way to construct a price index, it may not be reasonable to apply the consumption patterns and the substitution patterns among the population as a whole to the elderly. The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index (CPI-E) which reflects the consumption patterns of people over age 62. This index has shown a rate of inflation that averages 0.2-0.3 percentage points higher than the CPI-W.

The main reason for the higher rate of inflation is that the elderly devote a larger share of their income to health care, which has generally risen more rapidly in price than other items. It is also likely that the elderly are less able to substitute between goods, both due to the nature of the items they consume and their limited mobility, so the substitutions assumed in the chained CPI might be especially inappropriate for the elderly population.

While the CPI-E is just an experimental index, if the concern is really accuracy, then the logical route to go would be for the BLS to construct a full elderly CPI. While this would involve some expense, we will be indexing more than $10 trillion in Social Security benefits over the next decade. It makes sense to try to get the indexation formula right.

Are Social Security Benefits Adequate?

While some people have tried to foster a myth of the elderly as a high living population, the facts don’t fit this story. The median income of people over age 65 is less than $20,000 a year. Nearly 70 percent of the elderly rely on Social Security benefits for more than half of their income and nearly 40 percent rely on Social Security for more than 90 percent of their income. These benefits average less than $15,000 a year.

The reason that seniors are so dependent on Social Security is that the other pillars of the retirement stool, employer pensions and individual savings, have largely collapsed. Defined benefit pensions are rapidly disappearing. Defined contribution plans, like 401(k)s have also proved grossly inadequate. Only around half of the work force even has a defined contribution plan available to them at their workplace. In a period of stagnant wages and limited employer contributions, workers have generally been unable to accumulate much wealth in these plans. According to the Retirement Research Center at Boston College, the median value of 401(K) and other defined contribution plans for those near retirement who have a plan is $120,000, enough to get an annuity paying $575 per month.

For most workers the vast majority of their wealth was in their homes. The collapse of the housing bubble destroyed much of this equity. Counting all forms of wealth, including equity in a home, the median household approaching retirement had just $170,000 in wealth in 2011.

The proposed cut in the annual cost of living adjustment will be a substantial hit to a population that for the most part is ill-prepared to see a cut in its income. The effect of this cut on the income of the typical beneficiary will be larger, measured as a share of income, than the return to Clinton era tax rates on the richest 2 percent will be to the people affected. It is also worth noting that this cut to benefits will affect current retirees, not just people who will be collecting benefits 10 or 15 years in the future, who might have some opportunity to adjust to a cut.

Is the Chained CPI a Reasonable Way to Deal with the Budget

It is important to remember that under the law Social Security is supposed to be treated as a separate program that is financed by its own stream of designated revenue. This means that it cannot contribute to the budget deficit under the law, because it is only allowed to spend money from the Social Security trust fund.

This is not just a rhetorical point. There is no commitment to finance Social Security out of general revenue. The projections from the Social Security trustees show the program first facing a shortfall in 2033 after which point it will only be able to pay a bit more than 75 percent of scheduled benefits. While this date is still fairly far in the future, at some point it will likely be necessary to address a shortfall.

It is reasonable to expect that the changes needed to keep the program fully funded will involve some mix of revenue increases and benefit cuts. However if the chained CPI is adopted as part of a budget deal unconnected to any larger plan for Social Security then it effectively means that there will have been a substantial cut to Social Security benefits without any quid pro quo in terms of increased revenue. This hardly seems like a good negotiating move from the standpoint of those looking to preserve and strengthen the program.

There is also the question of whether the Social Security trustees will even “score” this cut accurately. In the 1990s there were changes to the CPI that had the effect of reducing the measured rate of inflation by at least 0.5 percentage points annually (Economic Report of the President 1998 Box 2-6). This would have implied a reduction in the annual cost of living adjustment by this amount and a corresponding improvement in the Social Security trust fund’s prospects. However, there is no evidence of this improvement in the program’s finances during this period. In fact the projected rate of real wage growth (the difference between the nominal rate of wage growth and the measured CPI) was 1.0 percent in 1995, before the changes to the CPI. The projected long-run rate of real wage growth had actually been lowered to 0.9 percent in the 1998 Trustees Report (Table II.D.1) which was issued after all the reductions in the CPI had been put in place.

It is important to remember that the trustees projections come from the trustees, not the professional staff of the Social Security Administration. Four of the six trustees are political appointees of the president. It is certainly possible that the cuts associated with the adoption of the CPI will not be factored into the trustees projections just as the even larger cuts associated with the changes in the CPI in the 1990s were not factored into the trustees projections.

Finally, it is worth commenting on the idea of tampering with statistical measures to achieve budgetary goals. The United States has been fortunate in having independent statistical agencies that have fiercely resisted efforts to manipulate data for political ends. In fact, in the 1990s there was considerable pressure placed on the Bureau of Labor Statistics to make adjustments to the CPI which would reduce Social Security and other indexed benefits. Katherine Abraham, the then head of the agency was steadfast in refusing to make any changes to the index that were not justified by BLS research.

The current effort has the spirit of using statistics for political ends, for example by refusing to have BLS produce a full elderly CPI so we would actually know the inflation rate experienced by the elderly. There also has been some discussion of leaving some programs, such as Supplemental Security Income, tied to the current CPI so as not to hurt a seriously disadvantaged population.

Congress can decide the benefit formula for these programs as it chooses. The honest way to cut benefits is for Congress to explicitly vote to cut benefits, not to try to hide a cut behind a statistical manipulation. This is the sort of behavior that encourages public contempt for politicians and the political process.

Edging Closer to a Deal on the Cliff?

By Jared Bernstein
Dec 17, 2012

Yet another counter-offer just out, this time from the President. As I noted earlier, they could close a deal this week, or it could still fall apart. A month ago, I was at 75/25 we’re going over. I’m now 60/40 we’re not. At this point, the biggest outstanding question is less can they agree on numbers—that’s still big, but they’re moving closer with each offer. It’s: can Rep Boehner deliver the votes in the House?

*  *  *  * *

The White House would insist that the benefit cut to low-income seniors caused by the switch to the chained-CPI would be offset with some bump-up in benefits. They also wants to keep the debt ceiling off the table for two years (Boehner offered one year in his last iteration). Sequestration would be turned off and they’re still pushing for some temporary measures to help the near-term job market, including another UI extension and infrastructure investment.

And so on…I wouldn’t get too wedded to any particular plan. The main point is that there’s convergence towards an agreement. On the plus side, from my perspective, are new revenues, higher rates, and broader base, all locked in as part of this deal. If it stands, it’s a huge accomplishment and a direct outcome of the election.

Also, good for the White House for sticking with some jobs measures next year.

On the negative side, I really don’t like the $100 billion more of cuts from the non-defense discretionary part of the budget. These are programs that mean a lot to folks trying to get ahead, and we’re already cutting them to the bone.

There’s no deal yet and a lot of disagreement so don’t get too excited. (I heard something today about the Senate maybe setting things up to vote on a package Dec 26. That’s my birthday—how cool would it be to resolve the fiscal cliff on my birthday—best present ever!)

But also, not to be dyspeptic, but any joy you might feel from solving the cliff before (or very shortly after) we go over should be akin to the joy you feel from when you stop banging a hammer on your head. T’was dysfunctional government that brought us to this precipice and while I’ll be glad to see it resolved, it never should have happened in the first place.

And frankly, there’s a lot more we need to be doing than setting and solving traps for ourselves.

Obama Makes Third Offer to Avert Fiscal Cliff

By Sam Stein
Huffington Post, December 17, 2012

WASHINGTON — The White House made a new offer to House Speaker John Boehner (R-Ohio) on Monday to avoid the so-called fiscal cliff. The proposal matches the amount of spending cuts with revenue-raisers, calls for two stimulus measures and seeks an avoidance of a debt limit fight for the next two years.

The details of the offer were sent to The Huffington Post on condition of the source’s anonymity.

The White House has moved off of its initial and second revenue demands of $1.6 trillion and $1.4 trillion respectively. As of now, the president would be fine raising $1.2 trillion in revenue. He also is no longer insisting that taxes increase on families with income above $250,000. Instead, he is calling for a permanent extension of the Bush tax cuts for incomes of less than $400,000.

To meet the $1.2 trillion revenue goals, the White House proposal calls for limiting the tax benefit of itemized deductions to 28 percent for taxpayers. It would return the estate tax to 2009 parameters, which would mean that estates worth more than $3.5 million would be taxed at a 45 percent rate.

The compromise on revenue may be difficult for some in the president’s own party to swallow, though few would have imagined the White House scoring such a victory just one year ago. The spending cuts in the new proposal could be a harder sale.

In his latest offer to Boehner, the president proposes $800 billion in savings, including $290 billion in interest savings, $100 in defense cuts, and $130 billion in savings that would come from an adjustment to the inflation index for Social Security benefits. The administration insisted that there would be “protections for most-vulnerable populations” perhaps by indexing the changes so that they don’t affect those with low-income.

The president has refused to give in on another Republican demand: that he gradually raise the eligibility age for Medicare from 65 to 67. There is, however, $400 billion in health care savings included in his offer.

Additional components of the proposal include language that would call for the fast track pursuit of corporate and individual tax reform as well as “spending reform.” The White House proposal calls for a permanent extension of certain tax extenders (which ones weren’t made entirely clear) and the alternative minimum tax. The payroll tax cut passed two years ago would, under this proposal, be allowed to lapse without an apparent replacement -– a major blow for progressive economists, who argue that the economy is too fragile to take such a hit.

The president is, however, pursuing some provisions that would make his base pleased. His plan calls for an extension of unemployment benefits — set to expire at the end of this year -– and money for infrastructure spending. How much money is unclear, though the president’s first offer asked for $50 billion. Finally, he is demanding that the nation’s debt limit be increased for two years. He will continue to allow Congress the right to periodically vote not to raise the ceiling, but he would grant himself veto power over those votes.

That may be too much for Boehner to swallow. In his last offer, the speaker signaled comfort with a yearlong extension of the debt ceiling, but nothing more.

An administration official said that this was not the president’s “final offer,” but one that the White House viewed as a legitimate halfway point between the two sides. The official noted that the president already agreed to a trillion dollars in spending cuts as part of the first debt-ceiling standoff. When adding those figures to this plan, one gets to $3.4 trillion in deficit reduction. When considering war savings, that number goes up to well over $4 trillion over a 10-year period.

Boehner’s office did not immediately return a request for comment

With reporting by Amanda Terkel

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