Why Is President Obama So Anxious to Cut Social Security?

On his tour of the Midwest last week, President Obama again indicated his interest in cutting Social Security. He repeated a proposal that his administration first put forward in the debt ceiling negotiations: he wants to cut the annual cost of living adjustment by 0.3 percentage points.

This cut may sound small, but it adds up over time. A person in their 70s who had been getting benefits for ten years would see a reduction of 3 percent. By the time they were in their 80s, the cut would be 6 percent. And if they lived into their 90s, their benefit would be more than 9 percent lower as a result of President Obama's proposal.

For an average retiree who can expect to get benefits for 20 years, President Obama's plan would cut their lifetime Social Security benefits by roughly 3 percent. By comparison, his much feared tax increases on the rich would reduce the after-tax income of someone earning $300,000 a year by just 0.5 percent. In this case, a beneficiary who will be mostly dependent on their Social Security income in retirement will take about six times as large a hit relative to their income under President Obama's plan to cut Social Security than a couple earning $300,000 would from his plan to raise their taxes.

This cut to Social Security seems especially inappropriate since the near retirees who would feel the full impact of this cut have just seen most of their wealth destroyed by the collapse of the housing bubble and the plunge in the stock market. The typical near retiree (ages 55-64) has just $170,000 in net wealth, including the equity in their home.

This means that if they used every last penny in their 401(k) and other savings, they would have just about enough money to pay off the mortgage on a typical home. This would leave them 100 percent dependent on Social Security for their income. And of course, half of near retirees have less than this amount, meaning that they will not even be able to pay off the mortgage on a typical home. But apparently President Obama feels that these people need to make greater sacrifices.

The determination to cut Social Security is especially strange given the finances of the program. Under the law, Social Security is financed by the designated Social Security tax. It does not contribute to the deficit, since the law prohibits payments from being made if there is not money in the Social Security trust fund. That means that if the trust fund were drained, rather than contributing to the deficit, full benefits would not be paid.

And the date where this could be an issue is still relatively distant. The Congressional Budget Office just released new projections showing that the Social Security trust fund is fully solvent through the year 2038. Even after that date, the program would have enough money to pay 81 percent of scheduled benefits for the rest of the century. The folks who say that there will be nothing there for our children or grandchildren are just making it up or repeating the nonsense promulgated by some political hack.

Furthermore, this gap is not hard to close. Currently, the tax on the wages subject to the tax is capped at $107,000. The upward redistribution of income over the last three decades has caused a large share of wage income to escape taxation, as more money ends up in the pocket of CEOs and Wall Street types than ordinary workers. If all wage income were subject to the tax, then it would leave Social Security fully solvent for its 75-year planning period.

We could also go the route of increasing the tax on ordinary workers to cover the shortfall. After all, part of the story is that people are enjoying longer retirements, even if the wealthy have benefited much more from the increase in longevity than the typical worker. By 2040, average wages are projected to be 45 percent higher than today, adjusting for the impact of inflation. If just 5 percent of the projected wage growth over this period was used to finance Social Security, the program would be fully solvent for the rest of the century.

Most people would be surprised to know that 5 percent of the wage growth projected over the next three decades would be sufficient to keep Social Security solvent. After all, there is a well-funded and well-connected industry of people spreading disaster stories about Social Security and its massive deficit.

Many people will be taken aback by the idea of “projected wage growth,” after all most workers' wages have been stagnant or falling in recent years. This is true. The projections refer to average wages, which had been rising, at least until the recession.

This brings up the fundamental point. The country has been and is getting richer. The reason that most people do not feel better off is that most of the money has gone to those at the top. Part of the reason is that they have been distracted by nonsense about the crushing burden of Social Security, so they have not paid attention to the policies that put more money in the pockets of the rich. Unfortunately, at the moment, President Obama seems to be working with the distracters.