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COLA Changes - Pro and Con
The Congressional Budget Office (CBO) released a report that evaluates the consequences of adopting the chained CPI. I was surprised by the results. The numbers are "so good" that this approach will rise to the top of the budget cutting debate. I'm sure that was the intent of the folks at CBO with this timely release. (CBO LINK)
If America is going to accomplish anything with the debt/deficit issue it needs to either generate more revenue, or cut expenses. Some combo is going to be the outcome. The numbers have to be big. Anything less than $1T over ten years is hardly worth the effort. $2T would be desirable, but hard to achieve. Something around $1.5T over ten-years would take all the bull-shit over this issue off the front pages for a few years.
So we "need" $1.5T stretched out over a decade. The CBO concludes that we can come up with $340B (25%) of the nut by changing inflation calculations. That's a big down payment. Some details:
Changing the CPI has consequences to both government revenues and expenses. Expenses, like Social Security and other retirement programs will be reduced from what is now scheduled. Tax revenues will rise as a result of the inflation adjustments on tax brackets, and changes to refundable tax credits under ACA. The breakdown:
- For every dollar of increased revenue there is $1.7 dollars of expense cuts. Is this "fair"? I don't know, but it isn't unfair.
- 59% of the savings comes from reduced Social Security payments, while 17% of the reductions come from the retirement plans for the Military and Federal workers. The net reductions hit all of the government retirement programs equally, so this also seems fair.
- Adjustments to COLA will result in relatively small changes in early years. In 2014, the expense reduction is only $3.4B, in 2023 the reduction will be $70b. This a "desirable" outcome as those who will lose benefits will have a significant time to adjust to those changes.
- Most economists believe it would be a mistake to make sharp cuts in spending today. The consequences of adjusting COLA are consistent with what the economists "want".
- If the changes in COLA were extended for another ten-years beyond 2023, the cost savings would get larger and larger. Over a 75-year period the changes in COLA would save trillions, but in 75 years a cup of coffee will cost $5,000, so I'm not sure what any of these big numbers really mean.
Having discussed why the changes in COLA are economically significant, its now time to look at what is wrong with this proposal.
- The AARP, the liberal press and many progressive politicians are going to hate this plan. The mantra "Don't touch Social Security - it's off budget!" is going to be heard again-and-again. Changes to COLA can only be accomplished as part of a broader plan. That plan must included changes to Medicare and Medicaid. It will require that more revenues (eliminate deductions) be part of the deal. I have a difficult time believing that a "big deal" can happen given the rancor in D.C. today.
- The Generals/Admirals and Federal workers are going to get clipped along with SS recipients. I see that as a big problem.
- In the CBO projections there is an assumed increase in SNAP costs. SNAP = Food Stamps. Why would Food Stamp costs go up if COLA is adjusted? The CBO answers this:
CBO estimates that the proposal would reduce income to individuals who also receive SNAP.
Aha! Poor people will get poorer as a result, and therefore they will qualify for more Food Stamps, so costs go up. This is an unintended consequence, but it is a dumb one. This demonstrates how difficult it is to actually "fix" problems.
- Adjustments in COLA represent across-the-board cuts. This is stupid. 70% of SS beneficiaries NEED the benefits they will get, 30% don't. There is no "fairness" to that outcome. This may prove to be the fatal flaw of this proposal.
- The changes in the COLA formula should result in "positive" YoY changes. But there is no guarantee according to the CBO:
The actual difference in any year could vary noticeably from that average.
The estimates behind the "good" results are flaky. I hate it when that happens....
- The projected increase in revenue comes substantially from how the Affordable Care Act (ACA - Obamacare) will be "paid" for. But ACA doesn't exist today. This means we were sold a bill of goods when ACA was invented.
Adjustments to COLA means that the cost of healthcare for all Americans will be higher than what has been previously projected. So the biggest changes in the US healthcare system in 50 years is put on (more) shaky legs when COLA changes are made. This is the Whack-A-Mole problem. When one problem is "fixed" it pops up someplace else and causes even bigger problems.
- The proposed changes to COLA have a significant consequence to SS beneficiaries. But compared to what is programed to be spent, the changes are a drop in the bucket. These charts tell the story:
- To me, the issue of greatest concern is how SS will influence the Debt Owed to the Public. The following graph looks at the projected negative cash flow at SS with and without changes to COLA.
Conclusions:
Changes in COLA are coming - provided it is packaged with other measures that (A) decrease Medicare and Medicaid spending, (B) reduce military spending, (C) reduce other discretionary spending and (D) the elimination of many personal income tax deductions. What's the probability of that package being realized from the current crop of legislators? Does Zero seem about right? I don't see it happening.
Adjustments to COLA can add up to big numbers. But the numbers we are faced with are so large, the COLA changes are really just a rounding error.
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the tax policy center on the CBO report cited above by Krasting (as proposed by obama):
Republicans and many economists argue for shifting to a more accurate inflation measure, called the chained Consumer Price Index (CPI). President Obama would support a version as part of a fiscal grand bargain. Because Social Security benefits would likely grow more slowly under this measure, many Democrats and social insurance advocates strongly oppose the idea.
But a new Congressional Budget Office estimate shows fiscal effects that chained CPI backers might not want to see. It turns out that shifting to the new inflation measure would raise taxes by nearly as much as it would slow Social Security spending over the next decade. Indeed, after 2021, the adjustment would raise taxes more than it would cut projected Social Security benefits.
"“If America is going to accomplish anything with the debt/deficit issue it needs to either generate more revenue, or cut expenses”
Wrong. The only option is to cut expenses because the government never pays off debt with increased revenue; the government always spends more.
I agree, but it is damn near impossible to do that. To achieve some semblance of balalance without revenue increases it would be necessary to gut SS Medicare, Medicaid and the military.
Washington is not willing to do that.
Washington is also not willing to raise revenues to fill the bucket.
I don't see a way out of the box.
I am not convinced that what Washington is willing to do is germane to a discussion of what is necessary to return this country to solvency. The fact of Washington's willingness or lack thereof suggests that we will not fix fiscal problems.
A fix is simple enough... simple not implying easily accomplished... Just eliminate foreign entanglements. Of course we still have a morally debased society whose level of education has been reduced to that of a peasant class... Which means we are incapable of doing anything to fix the graft and corruption that runs rampant through our political infrastructure... So no matter what near term gains may be made, the long term picture is grim.
We will fix things by breaking them to the point there is nowhere to go but up. What will be left to rebuild with at that point is anyone's guess.
Personally, I am doing what I can to 'overwinter' my family. Perhaps the effort will bare fruit, perhaps not. But it is not in my nature to give up
without a fight.
However, further fudging the numbers is a game intended to keep the masses distracted while the psychopaths and sociopaths finish their plunder. The joke will be on them, however, as the bulk of them are non producing parasites. We all know what happens to parasites once the host has been killed.
Piddling around with the numbers is not going to make any difference.
You want to fix it all in one year?
Cut 100% every extra-constitutional aspect of the Federal Government and hand those responsibilities back to the states.
End all the alphabet federal organizations. End the income tax.
Hand the current social security recipients a private annuity that pays whatever their benefits are. Borrow/Print money if need be.
Everyone else can leave SS and do what they want with the money.
The reduced federal government can operate on 3 to 10% of GDP.
The house could end all the programs this year entirely by their own effort. No senate agreement, nor executive signature required.
The corporation, UNITED STATES OF AMERICA, has exempted itself from all GAAP rules of fiscal management. Proper accruals and timely reporting of the true condition of our country's finances would have woken people up many years ago.
America's politicians are just like Europe's
"We all know what to do, we just don't know how to get re-elected after we have done it."
-Jean-Claude Junker
Sounds good to me, bro'!
"With a can of white tuna in every pot" - don't mnd the uncontrollable oily anal leakage.
I got sick years ago. Bad liver. Nearly died. Didn't for some reason, but my liver was shot.
I met with an expert. His advice?
"Never eat fish again".
Everything will be solved as soon as we get all your guns, we are the government were here to help
Anytime these liars tell us they will cut in the future they are....wait for it...lying.
If the government was really interested in cutting costs, why the hell do we need upmteen 3 letter agencies duplicating each other's work? DHS/TSA/FBI/ATF, and the fucking list goes on & on. Eliminate some of these crap agencies, and the OCC/SEC as well since they don't seem to do anything but watch porn; they sure as hell don't arrest wrongdoers.
There's more than your 2 Trillion dollars right there and it won't force Grandma to eat kibbles n bits to survive.
Off topic: earlier this week my boss had to explain to a seasoned IRS auditor what a defined benefit plan is. Literally no idea how such a plan works.
For fuck's sake, any solution that involves giving these individuals MORE tax revenue is not going to have a dent in any deficits or long-term debt. Until CONgress shows some iota, some scintilla of fucking restraint, they don't deserve what they are currently getting, let alone one single dime more. This enabling bullshit by requiring the middle class to pay 30% of personal incomes to the govt every year has got to stop.
Good post Bruce, thanks for keeping us up to date on those issues.
Accounting gimmicks? That's the secret to balancing the budget? Just recalculate it? Jesus. That's the stupidest thing I've ever heard.
I can't afford something that I want because prices increase, I buy less of the item and this shows reduced inflation.
WOW! If I start skippping lunch because the price is too high, then we have deflation!
What an Fing joke! I wish our"leaders" would lead! Informative article.
their intention is to take a lot of it, DOD for instance, off balance sheet. thats what bush did with Iraq. that way they can keep spending on those government jobs we need to keep the economy going
You are correct. That's been going on forever. I don't think Bruce is justifying it, he's just acknowledging reality.
Chained CPI is a fraud--price of steak goes up, use the price of "substituted" dogfood instead. It would be much cheaper and beneficial to the allpowerful State to simply rob recipients at gunpoint. In fact, the whole budget is a scam designed to reward the politically "in" at the expense of people who work--putting lipstick on it doesn't change that.
The foundation of the whole system is "accounting gimmicks."
There is nothing that can "reform" that system in order to fix that!
Fiat money made out of nothing as debt is state backed fraud. For more than a Century in the USA, and throughout the whole of the British Empire, the basic systems have been legalized lies, backed by legalized violence. THAT WHOLE SYSTEM IS FORCE BACKED FRAUD. It was and is nothing but "accounting gimmicks," and the only possible "solutions" to its problems, which stay within that system, must be merely more "accounting gimmicks."
Gold and silver backed money was related to the laws of physics directly. However, fiat money is only indirectly related to the laws of physics, through the violence done by the government in order to back up that fraud.
IF, IF, IF, "money" and "budgets" were going to make enough real scientific sense, then they would have to be based on the laws of physics. The paradox is that they ARE, through the fact that the most labile component controls the system. That means that the most dishonest and violent people control society. Energy goes down the path of least resistance, which means, in human terms, down the path of least morality.
Only by building up the systems of resistance could we change the path of least resistance. However, those systems of checks and balances, that were supposed to enable that, have been mostly eroded away, by the rushing undercurrents of immorality, thereby enabling the privatization of legalized counterfeit money supplies, which then generated absurd budgets.
There ain't any way to have a sanely balanced budget which does not face the fundamental fact that money is backed by murder. Our extreme budgetary imbalances are due to the long history of organized crime covertly taking control over the government. Tragically, that has gone on so much, for so long, that it is almost impossible to image balancing the Bizarro World Budget with anything less than almost bottomless buckets of blood.
There is NOTHING within the established systems which could "reform" them enough.
Their basic paradigm and foundation is nothing but "accounting gimmicks."
Building an entire empire on the basis of runaway triumphant financial fraud appears to be, in the longer term, "the stupidest thing," however, there was nothing during each short-term increment of the evolution of that system to prevent it from nevertheless happening. Therefore, we have now built an entire global economic system based on "accounting gimmicks." Since everybody who was successful within that system has adapted to accept a fundamentally fraudulent financial accounting system, there is hardly anybody left within that system that could understand it. The only genuine solutions must be "monetary revolutions" which return to more radical truths which are consistent with the laws of nature. However, it appears that the only way that can happen is through the processes where the laws of nature eventually manifest by collapsing the craziness of civilization into chaos. ... Even then, I would not be too optimistic that we will not see invented the next set of "accounting gimmicks," which become the next incarnation of "the stupidest thing I've ever heard."
The only way that we can have a more sanely balanced budget is with one that respects energy systems. However, those will have to face the core paradox that society ended up being controlled by deceits. If and only if enough people understood that might it be possible to construct a better balanced budget, through a better dynamic equilibria of the different systems of organized lies, operating organized robberies.
Well, in my defense, I meant it was the stupidest things I'd heard so far.
"Something around $1.5T over ten-years would take all the bull-shit over this issue off the front pages for a few years."
Sorry, that is total rubbish. US debts and unfunded liabilities are increasing at $8.2 trillion a year. In a few years, Medicare runs out. So in 10 years, US debts and unfunded liabilities will increase by over $100 trillion at least. So $1.5 trillion is not even a rounding error in those massive numbers.
Incidentally, some estimate US unfunded liabilities at $222 trillion today (Kotlikoff) and increasing at $11 trillion a year.
http://www.usdebtclock.org/ (US debt and unfunded liabilties today)
http://www.usdebtclock.org/current-rates.html (US debt and unfunded liabilties in 2017 at current rates)
http://www.bloomberg.com/news/2012-08-08/blink-u-s-debt-just-grew-by-11-... (Kotlikoff)
It seems "unfunded liabilities" are not so cut-and-dry:
http://truth-out.org/news/item/13139-entitlements-scare-tactics
You quote me perfectly, and then go on to say it is rubbish.
Read it again. ....take all the bull-shit over this issue off the front pages for a few years."
"For a few years" means 24 months. It does not mean forever. The problems will resurface after the mid term elections. There are no "real" solutions .
I think the game here is to buy those 24 months. Will they succeed? I said in the conclusion that I didn't see it happening.
24 months is two years. A "couple" is two. "Few" is that nebulous number that politicians use to cover their asses. You don't want people to give you a hard time then you should have said "24 months."
Yeah, A few makes me think no less than 3.
Agreed. Hear hear!
You're right, I was wrong.
few adjective a few, a small number of, a sprinkling of, hardly any, inconsequential, inconsiderable, infrequent, least, less, little, littlest, low, lowest, meager, minimal, minimum, negligible, not many, not too many, picayune, precious few, rare, scant, scarce, scarcely any, seldom, several, small, smallest, some, sparse, trifling, unimportante.
BUT......
Excess of two.
Sincerely,
I Stand Corrected
Is it your impression that somewhere down the road the political climate between the two parties will be such that there is a workable solution? Sometimes I read that you think so even though you don't say it. Please correct me if I'm wrong.
I agree they might get it past the next elections, but there is no solution IMHO. The acrimony will get worse. There is no hope.
Always enjoy your posts.
Well, it can't get much worse than it is today.
That's illogical. You just got through proving that it's going to get much, much worse.
Absolutely right. Bruce is Swiss, he should be able to do math.
Some of us keep pointing this out, but the policy wonks refuse to listen.
The Tax Payers' Union had some reasonable estimates a few years ago, but tracking every damn government contract and guarantee is impossible.
The real debt is at least an order of magnitude higher than reported numbers.
The truth is too horrible to contemplate - so we must resolutely ignore the truth.
The Fed's own Richard Fisher (Dallas Fed) gave similar mammoth numbers in 2008:
"Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent."
"With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income."
Now per-person payment required is $440,000, up from $330,00 in 2008. That payment is only increasing $26,000 a year. By 2015, it will be $2.0 million for a family of four.
http://www.dallasfed.org/news/speeches/fisher/2008/fs080528.cfm
Rollerskating around the event horizon...Make sure those laces are tight because it's gonna get bumpy soon.
While I appreciate Bruce's deciphering .Gov's hieroglyphics to get a fuller picture of their proposed machinations, I'm inclined to agree with suteibu's observation.
I see using a chained CPI more like a well digger who has dug past the point of being able to climb out of the hole, has chosen to smooth the edges of the pit rather than the difficult task of tunneling out.
drop all the tax breaks for families (no benefits for procreating, and while they are a small tax benefit, they are a huge social services liability)
let all those guys who are in jail for back child support get out and work, and no going after them for back welfare after they get out of jail. we tell the GOP to keep their hands off birth control, and family planning. now maybe unmarried teenage girls will be incentiized to not have bastard children out of wedlock.
if all the people procreating in an irresponsible manner stopped, then men could work and the burden on social services would vanish, and we senior citizens could sit in our rooming house and eat our cat food in peace, instead of baby sitting a bunch of fatherless childen, while mommie does drugs. now that's a means test
The societal fear of allowing individuals to suffer the consequences of their decisions is what causes bad choices. Since the legalization of abortion and birth control we have seen out of wedlock births skyrocket. Maybe if you were King you could sterilize the less desirables.
the correlation between availability of birth control methods and out of wedlock births has no basis. the federal government should not be using taxpayer funds to empower women in order to declare their independence through illegitimate birth, and to put men in jail and attempt to place the liability on them, and label them as criminals. that much should be done, the rest is matter for society and individuals, but the current economic solution is to stop promoting this behavior.
The birth rate of Americans, NOT illegals, is already way too low.
since we are monetizing the debt there is no need to pay any interest on it. All we need to do is eliminate using the big banks as middle men money launderers between the Fed and Treasury.
That is exactly true. Monetize it all and kick the banks to the curb as far as money creation. Let social security and government pension plans fund the mortgage market, which despite all the problems is still a windfall for the banks and investors.
That's actually not a bad idea. Unfortunately, it is quite fascist.
Not that I'm against fascism in certain cases, such as banks, railroads, and airlines, but the label would be horrendous and it would never fly.
I think government should indeed oversee these things, as long as there is an honest and accountable government to do it. Leaving money in the hands of people who would take us repeatedly to such extremes is an even worse idea.
What is really obscene about COLA is that it does not apply to Congressional Pensions - they know it is a crock.
Why do we have COLA in the first place - to counteract the effects of Fed policy and Congressional overspending.
The idea is that retiree's checks should enable them to buy the necessities of life if the rise in price over time.
To specifically go an rig the COLA so that it ignores price increases in the necessities is fraudulent and immoral.
If all else fails, just change the rules to make it look better. We've been down this road before. It solves nothing in the long term; the welfare state is a Ponzi designed to fail. CPI, COLA, means testing are all political tools used to the same effect as patching a pothole rather than repairing the problems in the roadbed that caused the pothole.
"Commander, you're looking at the only Star Fleet cadet who beat the Kobayashi Maru test."
"No way. That's totally like a no-win situation. How'd you do it?"
"I simply altered the parameters of the exam."
"Oh...so you cheated?"
Seriously, people? Everyone gets a trophy? No one loses?
What the hell happened to this country anyway?
:/
"What happened to this country". The god of entitlement took it over.
"The god of entitlement" is the Federal Reserve Board.
@Krasting:
... while the status quo carries on as per normal in the background. That's the assumption, that fiddling with the margins will, a) make a big difference, and b) not scare the horses at the same time.
While this self-fooling nonsense is underway, the status quo in the background is disintegrating! Large chunks are falling off the status quo while the establishment pretends publicly that everything is fine ... "for another 100 years"! As a matter of fact, the country and the world has a severe and growing non-renewable resource shortage, reflected in increased market prices, of strategically important minerals, fresh water, topsoil/soil fertility, waste-carrying capacity, biodiversity ... credit ... of course, all important sources of energy: coal, fissile materials, natural gas and the master resource, petroleum.
Petroleum shortage = diminished/zero gas, coal or precious reactors. What do we do with our valuable petroleum? Waste it for nothing driving aimlessly in circles in unaffordable metal boxes.
+$20 petrol has stranded all the infrastructure built assuming -$20 petrol to infinity and beyond ... such as the United States of America. We're broke! Brent yesterday ended $110.40. People wonder why banks, governments, industries and enterprises have failed/are failing!
C'mon, Sherlock! It's not that hard. They all lent long while borrowing (fuel) short.
What to do? Large-scale systems must hold together at some level otherwise the marginal human does not get fed. That is what the entire Social Security argument is about: survival. No food = violent revolution = uncertain outcomes for everyone including the rich. Meanwhile, back at the endgame, which is NOW ... there is obvious and desperate theft by well-positioned criminals in high places.
The fact of the theft by itself is evidence that those in a position to know understand there is no future, that nothing remains but to empty out what hasn't been stolen previously.
+ 100!!! You should write articles for Zero Hedge!
Creating an even less realistic CPI figure might backfire if people decide they want 'hard' money and box the Fed's freedom of manoveur in. The SS cohort of the population is growing and they vote. 2% inflation target for the Fed might become 0% in which case we would be back to where we started, no?