AARP Agrees To Benefit Cuts?!?

June 17th, 2011 at 7:16 pm

This is a big story, for obvious reasons.  Seniors have been a powerful lobby against benefit cuts to Social Security and if their main representative organization here in DC is OK with cutting benefits to close the funding gap, then such cuts are a lot more likely today than they were yesterday.

But before you get the scissors out, a few things to keep in mind.

First, you might get the impression from this debate that Soc Sec benefits are chump change to seniors.  But in fact:

“…for recipients age 65 and up on, Social Security is about two-thirds of their income and that share grows with age—for the old-elderly, it’s closer to 70% of their income.  Other data show that for a third of those over 65, Social Security accounts for at least 90% of their income.”

So if you must cut, you’ve got to go to the top of the income scale, and here, from Dean Baker and Hye Jin Rho, the fact is:

“The percentage of benefits that go to affluent seniors is too small to make very much difference to the program’s finances.”

Note that Baker and Rho are critical of means-testing Social Security (tying your benefit levels to your income at retirement).  There are other ways to cut benefits but means testing is the worst, IMHO, as it undermines the universal nature of the program, is administratively complex, and breaks the link between what you earned and what you get back.  But any plan to cut benefits must deal with this problem that you’d have to cut pretty deep into much needed benefits to close much of the gap.

Finally, I very much object to the way this point is made in the NYT article:

“The most recent estimates from the Social Security Administration, issued last month, indicate that under currrent law the program’s trust funds will be exhausted by 2036, and that $6.5 trillion in additional money will be needed over a 75-year period to pay all scheduled benefits.”

That shortfall number sounds impossibly high, doesn’t it?  It leads the reader to think, “Hey, I hate to sign on to this, but that’s a friggin’ huge shortfall.”

But it’s not!  Not if you put it in the correct context, which factors in 75 years of economic growth.  In fact, it’s less than 1% of GDP.  Back over to Baker:

“The best way to make the size of the projected Social Security shortfall understandable is to put it in context. Relative to the size of the economy, the projected Social Security shortfall is equal to 0.7 percent of GDP. By comparison, annual spending on the military increased by more than 1.6 percentage points of GDP between 2000 and 2011. So the burden imposed by the wars in Iraq and Afghanistan are almost 2.5 times larger than the money that would be needed to eliminate the Social Security shortfall.”

The reason it’s so important to get the context right here is that the real magnitude of this shortfall–0.7% of GDP–is probably manageable without benefit cuts.  Taking them off the table won’t be easy, because it means you have to get the revenue elsewhere, but it could be done.  I’d vote for closing two-thirds of the shortfall by raising the tax cap on earnings to once again cover 90% of earners, shifting to the chained CPI (which also shaves benefits), and including state/local workers.  Believe me, closing two-thirds of a 75-year gap–who knows what’s going to happen between now and then (maybe the wars will end!)–would be an excellent day’s work.

I’m sure AARP knows all of the above.  I’d like to learn more about why they changed their position on this.  But for now, if we must go to the benefit-cut place, let’s tread very, very carefully.


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16 comments in reply to "AARP Agrees To Benefit Cuts?!?"

  1. Ron Force says:

    AARP denies WSJ story: ter/info-06-2011/aarp-has-not-changed-it s-position-on-social-security.html

    • Red Planet says:

      I’ve read that press release closely. Nowhere does AARP’s CEO deny the story that benefit cuts are on the table. It’s the usual non-denial denial that we’re accustomed to seeing in these cases.

  2. Michael says:

    I am absolutely baffled by the existence of support for means-testing on Social Security and Medicare, and the absolute opposition to raising taxes on wealthy individuals.

    Why in the world are people in favor of an expensive system full of fraud and human misery, and against upping our already-functioning income tax system back to Reagan-era rates, to solve the exact same problem?

    • WASanford says:

      The answer to your question is easy! The capitalists are in charge and any profits to be made are directly re-distributed back to the public by a socialistic system, which is what Social Security is. This isn’t about socialism however; it’s about the large pile of money the system has in its accounts.

      If you’re a multibillionaire with more money than some nations; do you really want to grab a piece of that pie? Yes you do! Greed knows no bounds!

  3. John says:

    You’re probably getting tired of me…

    Way before 1815, someone wrote a passage known the parable of the workers. Matthew 20:1-16.

    Being a socialist, my opinion is that “from each according to ability, to each according to need” could certainly apply to Social Security and to payroll taxes, not to mention unemployment benefits.

    But regarding AARP’s concession and others who argue that retirement age should be raised, I just wonder why just the opposite isn’t more strongly argued. We have a labor glut – young folks can’t enter the labor market because older folks need employer-based health care until retirement age, so there’s pressure from both ends. Lowering, not raising, the retirement age would relieve some of that pressure. Not my original idea, of course, but a very good idea IMO.

    I used to have economists tell me (maybe you, JB) that economics was not a zero-sum game. True enough, but it’s closer to zero-sum than to infinite-sum. But I still see it, at least in the form of the “lump of labor fallacy” even from progressive economists who use it to oppose shortening working hours as another possible means of decreasing the labor glut. To be consistent, it would seem to me, long-term funding of Social Security should then not be such an issue; to argue that it is seems to argue that there’s something fixed about the labor market relative to retirement funding, but not to employment in general.

    I am of the strong opinion that the labor glut will only get worse, because my discipline has been so successful at reducing the demand not only for labor quantity but also labor skill, and that trend is not cyclic – it will continue, never ceasing unless or until we destroy ourselves entirely. Whatever the economic sum is, the contribution to/from labor is decreasing, and that’s easy enough both to observe and to explain.

    That being the case, I expect the time will come when labor as a basis for income will no longer be a viable model. I believe we’re at the cusp of that era already. We need to start considering an alternative model. From each according to ability, to each according to need, seems as good as anything else I can imagine, and not just for retirement funding.

  4. general c. san desist says:

    …now you’re hunting with the right dog. Raise that cap on income, I’ve advocated no limit, but 90% wont produce a quibble from here. Should they up the age on benefits…no stinking way. Then it would truly be a widows & orphans fund. My view is down to 55 for 10 years & let the young get to work building out the smart grid & so on. This is not rocket science. With the cap removed, I would further suggest an increase in the monthly stipend of double. Reverse the orange peel philosophy, refuse to be used up & discarded.

    We live longer not by the grace or gift he gie us (sorry PK, enjoying the rain?) but by modern medicine & a fairly unethical Hippocratic oath. Their credo is keep ’em alive ’til the bed sores win. What kind of strategy is that…cashing in on our expiring.

    This is America, home of the…you know the pitch. I wish not to be the skunk at the garden party but the Declaration of Independence was conceived & signed by some pretty sober minded radicals wishing economic freedom. The conservatives were dragged kicking & screaming to the signature line.

    As to the AARP thingy…could be one of two tactics. Wishing to stir the pot or it’s the Kool-Aid.

  5. Geoff Freedman says:

    My comment concerns the paragraph in this blog referencing Baker’s comments about the shortfall in Social Security expressed in terms of GDP vs the increase in Military spending expressed as a percentage of GDP. Please look at the numbers below.

    2001 2010 Added Pct increase
    D of Vet Affairs 50 112 62
    Defense 292 683 391
    Intelligence 40 80 40
    Dept Homelnd Sec 0 53 53
    State Dept 8 50 42
    Foreign Aid 15 23 8
    405 1001 596 147.2%

    Social Security 422 701 279 66.1%
    MedicareMedicaid 349 793 444 127.2%

    Most of this info came from U.S Budget data cira 2001 2010 respectively. We now spend over 1 TRILLION dollars annually on defense/foreign affairs.

    This was done at a time when we decreased tax rates that translates into 330 billion in current dollars.

    Why we are almost exclusively focusing on Medicare – Social Security when the biggest increase in expenditures is in Defense/Foreign is beyond me unless you look at this politically.

    The numbers I found for our defense/foreign policy is supported by Chalmers Johnson in the book ‘Dismantling the Empire’.

    We seem to be selective on what we want to pay for and that is a very sad observation; we need to start looking at our spending in a responsible way.

  6. Jeff H says:

    Everyone in the debate knows that SS doesn’t add to the debt. If there is a problem with SS in a few decades, then open up the top end, so that people pay SS on ALL their income, not just on part of it.

    There, I fixed it 😉

  7. pjr says:

    Gradual increases in the wage cap and gradual increases in the payroll tax, over decades, would make Social Security solvent forever. And these incremental hikes could be stopped when justified by new projections by the Trustees. If retirees are going to be living longer, which is true especially for retirees who have had relatively high earnings, they should contribute more during their working years to cover benefits paid into their 80s and 90s.

  8. PeonInChief says:

    This wouldn’t be the first time AARP has capitulated to the ruling conventional wisdom. AARP supported the increase in the retirement age in 1983 too. (The increase in the retirement age is actually a benefit cut, as half of all Social Security recipients begin collecting at age 62.)

  9. jonathan says:

    Without checking, I’ll assume the $6.5T is not a present value of the total contribution necessary but the count of dollars necessary over that 75 years. (Otherwise, $6.5T would be a huge number.) I have no idea when the dollars are valued, but I’ll assume it’s today’s dollar value or something close to it. I’ll also assume the benefits are adjusted; all the contributions and payouts are future valued, not held constant.

    If this is true, then merely dividing says the number is pretty darn small. It’s about $87B a year. If we had to pay that money now, it’s much less than we have been paying each year for the wars in Iraq and Afghanistan. But we don’t even begin paying until 2036 and that means the $87B will be less of total spending than it is now – unless the GOP manages to eliminate the US and return us to confederation.

    This comment is really meant that to show that throwing out numbers without a clear statement of what they assume leaves them open to all sorts of interpretations. You could be more careful to spell them out. I’m sympathetic to the arguments made but I shouldn’t have to guess at what the numbers are trying to say. I happen to be very good with this stuff but most people, including intelligent people, are pretty darned useless at understanding present and future values or what constant dollars means, etc. I’d bet you cash that I could recite your figures to conservatives and they would not understand the literal meanings of the numbers but would instead use the lack of clarity to interpret the figures to fit their beliefs.

  10. Davis X. Machina says:

    It’s not that SS adds to the deficit.

    It’s that all that money just sits there. Collected by compulsory process. From nearly all of us. Just sitting there.

    Not spinning off salse commissions. Not earning management fees. Not like other people’s money is supposed to. Not doing a damn thing for the FIRE sector.

    It has driven a lot of people mad, just looking at it.

  11. chris says:

    Regardless of AARP’s position, the WORTHLESS DEMOCRATIC PARTY, led by the FRAUD Barack Obama, will CAVE on this issue. The WORTHLESS DEMOCRATS, determined to do things in a “third way” will not rest until they have completely decimated the middle and working classes and dismantled NEW DEAL Liberalism in favor of the oligarchy’s neo-liberal, trickle down BS which they have the audacity to call Keynesian.

    • Roy says:

      Now that is the pot telling the kettle he is black. It is the Repugnants who are destroying the middle class at the behest of their super rich friends. So before you spout off, check the facts.

    • Carol Wilson says:

      Chris, you might be watching Fox News too much, it’s a great source of misinformation. The Democrats are the ones fighting FOR the middle class. It’s the Republicans who demand we reduce the deficit through spending cuts to programs affect middle and lower income people: Social Security, Medicare, Medicaid, education, health reform, etc. They refuse to consider increasing revenues by ending tax loop holes and government subsidies to the ultra wealthy who finance their campaigns.

  12. Alan Lidstone says:

    When the price of crude oil goes up, the energy sector increases prices for the product. When the cost of health insurance goes up, the health insurance sub-sector of the financial sector, increases the premiums for the service. When the nation-wide banks were looking for someone to cover their horrendous losses from bad management policies and risk analysis, they simply increased fees for customers who had nothing to do with their real estate and commercial losses. The examples are numerous.

    Why then, does the AARP not simply advise seniors that a Social Security benefits solution to retain the current retirement age and benefitsfor future retirees could be accomplished with small increases in the amount of earned income subject to Social Security FICA payroll taxes and the tax rate of the Social Security FICA payroll taxes? I know it’s obvious; but it would still be appropriate to suggest it as an option.

    Offering retirees the option of increasing their premium/payroll taxes is exactly what the free market offers for all other goods and services when costs start to rise. Are the current 47-million Social Security retirees along with the tens of millions of upcoming baby boomer Social Security becoming eligible for Social Security retirement benefits considered too dumb, too senile, or too smart to be asked if they prefer a benefits cut, or a premium increase simply because the Social Security program is outside the financial services sector?