The fiscal cliff and odd bedfellows

What a strange turn of events. If we are to believe the leaks on the deal being cut for the fiscal cliff, it appears that President Obama’s agenda was narrow-restore fiscal sanity by upping the tax rates on very high earners. In the process, he appears ready to concede to House Speaker John Boehner a Republican plan to alter Social Security benefits recommended by the Simpson-Bowles commission. What an odd legacy the president would be leaving. The cut in Social Security benefits that Boehner proposes would have a disparate impact on African Americans, the group that voted most vociferously against the Republican worldview. One would think the president’s agenda going into the fiscal cliff negotiations would be to remind those who worked hard for his election why it mattered he won.

The cut in benefits is the result of deciding to switch to a theoretical measure of inflation that is meant to capture consumer’s making “minor” changes in purchases to cheaper items from preferred items. It is being pushed because some people think that veterans’ benefits, Social Security benefits and other federal program beneficiaries face lower cost of living problems than the current measure of inflation captures. The result they claim is that we are over adjusting federal benefits. They claim we could save lots of money without making anyone worse off by more accurately measuring inflation.

First, the measure is experimental. It is not the standard measure of inflation. So, this is all speculation. Second, the data we do have on the prices faced by seniors in an experimental index that the U.S. Bureau of Labor Statistics (BLS) has produced suggests that seniors face higher cost of living changes than the current measure of inflation and so far from not being worse off, seniors, especially those who live longer will face a compounded decline in their lifestyles. The problem is compounded because the gap in the price indexes grows over time.

But, more disturbingly, the reality is that all Social Security beneficiaries are not aged. This is clear among African American Social Security recipients where nearly 40% are under 62. This is because one in four Social Security checks for African Americans goes to a worker with a disability. This key element of insurance that Social Security provides far outweighs issues of shorter life expectancy for African Americans. Further, by including the spouse, widows with disabilities and the children of workers with disabilities, nearly 30% percent of African Americans receiving a Social Security benefit are being helped because a worker or his widow has a disability.

Obviously, someone who has a disability is facing health care issues and faces costs that are rising faster than general inflation. Merely paying people with disabilities a general cost of living adjustment puts them behind but cutting their adjustment for prices is unconscionable.

The administration is reported to have adopted the Simpson-Bowles commission recommendation to help those who get to very old age by giving them a one-time payment to adjust for the deterioration in benefits they will suffer. And, the administration will reportedly exempt SSI (Supplemental Social Insurance) benefits for the extremely poor from the cut in benefit adjustment for inflation. However, while African Americans are disproportionately poor compared to many groups in America, the vast majority of African Americans are not poor and do not qualify for SSI; and, of course African Americans do not have the life expectancy to benefit from the one-time bump up for the very old age. In short, African Americans are getting the brunt of the cut that Boehner and the Republicans want.

The real issue facing Social Security is not that its benefits are too high, or growing too fast. Social Security has a minor funding gap because its revenues are too low as a result of growing income inequality. The Federal Insurance Contribution Act (FICA) tax that supports Social Security is capped, so income above the cap is not taxed-a zero marginal tax rate for the highest earners. But, the majority of income growth since the 1980s has gone to those who have incomes above the cap. As a consequence, for the same benefit amount, those high earners have been paying a smaller and smaller share of their total income. Everyone below the cap has been paying the same share of their income. So, raising the cap on FICA taxes is the real way to address the problems Social Security has.

But, our economy and nation have their own cliff. The majority of Americans 39 and older are unprepared for retirement. The flat incomes of the past decade, the loss of jobs, the loss of home equity and the fall of pension funds mean that America’s workers will soon be facing a bleak day. Too old to be competitive in the labor market, they will be forced to live on inadequate incomes. The real problem America faces is that Social Security benefits are too low. The idea of cutting Social Security benefits in the face of the coming crisis is bizarre at best. The idea of accepting Boehner’s cut for African Americans, just a little over a month since Nov. 6, well, that is just strange.

William Spriggs is the chief economist at the AFL-CIO

Reposted from AFL-CIO NOW blog

Photo: Speaker of the House John Boehner, R-Ohio, speaks to reporters about the fiscal cliff following a closed-door strategy session, Dec. 18. J. Scott Applewhite/AP