News Release

Is Obama About to Cut Social Security?

DEAN BAKER, ALAN BARBER, NICOLE WOO [email]
Baker is co-director of the Center for Economic and Policy Research. He is available for a limited number of interviews. Barber and Woo are communications director and director of domestic policy for CEPR.

Baker just wrote: “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 20 years, then the average reduction in benefits will be roughly 3 percent.” Baker addresses three major questions:

* 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. … It may not be reasonable to apply the consumption patterns and the substitution patterns among the population as a whole to the elderly. … The elderly devote a larger share of their income to health care, which has generally risen more rapidly in price than other items. …

* 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. …

* 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. …”

Baker’s books include The End of Loser Liberalism: Making Markets Progressive and Social Security: The Phony Crisis. Barber and Woo just wrote the paper “The Chained CPI: A Painful Cut in Social Security Benefits and a Stealth Tax Hike.” [PDF]