About the Chained CPI on the FICA

My friend Norman Goldman (normangoldman.com - podcasts only $5 a month, $50 a year) points out that Social Security is not an entitlement but a Federal insurance program (the notation on your paycheck for it is usually "FICA"= Federal Insurance Contribution Act, which mandated payroll deductions to support the program*).  I will take heed and stop thinking that all participants are "entitled" to the current level of benefits, for the current level of contributions.  A lot of people do tend to think that way, I will admit.

Anyway, this peculiar little bone that President Obama has offered to the would-be austere Republican Congresspeople seems to cause a lot of confusion on all sides.  Some point out that this is a "cut", which is going to rob "seniors" of their benefits that they have purchased; others are saying that this is needed to balance our budget, or to preserve the program for the "millennials" (officially, those born 1987-2006) who will be inheriting the benefits after the devastation that will be caused by the boomers' retirement tsunami.  Many have argued that Obama has negotiated badly, giving up something for nothing. Is this a betrayal, or a sop?  Is it a major concession to the Republicans, or to whom?

I would like to suggest that the facts are as follows:  Social Security does not add to the deficit--today--it runs a surplus.  It will run a deficit in the future unless something is changed, but it is a very manageable problem which has several possible solutions; deficit financing of the program during the peak period of its stress (roughly 2025-2045) would be one of the less desirable ones, but hardly impossible--then it gets better for the program.  People today gain much more from the program than they put in, on average.  Seniors will not be penalized all that much from the proposed change, as it will cause a small change in the annual rate of increase of benefits.  That change will have a cumulative effect; over a long period of time it will end up saving a huge amount of money.  It would mean that the young people will have a secure retirement benefit, but one that will have considerably less value (as compared to today, in real purchasing power). On the benefit side for the young, it would allow the program to maintain the current retirement age (67, with full benefits), which I think is a good idea, regardless of the arguments of those who argue that life expectancy for retirees has lengthened.  Their implied conclusion--that we should therefore force people to retire later--is contrary to my point of view that progress means improving quality of life.

Politically, it is a risky move for Obama--yes, he has peed on the third rail of US politics--but he is in a good position to take that risk.  He is taking the long-term view, which is entirely appropriate and somewhat novel, so I have to approve of the concept.  It does not do much to change the current budgetary dilemma by itself, but if it gets the Republicans thinking "deal" as opposed to their usual starting and ending position of "no deal", it could be an effective ploy.  I don't think many Democrats will vote for it in isolation, but as part of a larger agreement they could vote for it, once they understand that the effect on current retirees and near-retirees will be minimal.


*Also known as "Old-Age, Survivors, and Disability Insurance"-- OASDI.