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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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in the final deflationary outcome a few points of COLA will be more than offset by increased value of the dollar. just tell them (USG) to kiss their MBS paper goodbye, drop housing prices, let working people back into the economy, (and this time they can afford a house without government corrupt manipulations and GSE backing) where their payroll taxes will help keep the SSN retirement fund going (and send the rest of the entitlements back to the states: disability, education)
i'm not worried about SSN retirement, the pols can't really do much to that one way or the other, and like i say, diving board (asset) deflation helps people out with their property taxes, and while (user or price) inflation may take off, there's SNAP and reverse mortgages, which most old people should probably be doing, (and dont spend it on some goddam stupid ass carnival cruise) but buy Tips and gold.
no Federal Program "works" (fiscally) in an economy like this. Under Reagan the projections of Social Security were dire indeed. And yet he/we were saved by an extraordinary recovery along with the introduction of women to the workforce "en masse." We can't have a repeat of that situation not only because "we'd have to find an equal number of space aliens" this time around but also the economy isn't generating the necessary growth to create the employment numbers in the first place. As Japan shows you can live we these deficits (although they have to level off...which is exactly what are polity is doing right now) for a surprisingly long time. I simply find Alan Greenspan's quixotic belief that in a strong equity market we will get the correct amount of "revenue offset" to keep the system functioning. The trade off with the Street is massive job and income losses...this impacts the basic functioning of the economy negatively far more than any "positive" from some millionaire becoming a billionaire. There is no good "jobs program" per se but i have been following the sudden growth spurt of 3 dimensional printing in the hopes that this can realize Henry Ford's dream of "every garage a manufacturer." The USA has a lot of infrastructure and "housing product" with which to make things and by extension "employ people." But it is the making of making things...the vestiges of the industrial revolution...that is holding the American economy back in a big way in my view. Government is very much beholden to big energy companies and the media and the totality of their interests...the result has been a zero growth economy going on four years now. I say if there is an actual "system reset" where on the basic components fails then that is a better alternative than slashing Social Security benefits to the bone.
Bruce-
Off topic, I'm afraid...
Listen to the words from "Too much of nothing" by Peter, Paul and Mary and see if they don't ring a bell wrt zero interest rates.....
No discussion at all of what is really happening here?, i.e. inflation is already massively understated and undercalculated...
via hedonics, i.e. my computer processor is more powerful so the computer must actually be going "down" in price.
via substitution, i.e. can't afford steak because it is up in price, as long as you have some possibly horse meat tainted ground "burger", you have no inflation there
via "core" only really counts, i.e. people don't really need food or energy, they can "eat their more powerful ipads" if necessary
via ridiculous weightings that have no basis in reality to the way that people actually utilize products and services, i.e. seniors facing healthcare costs that rise at levels of magnitude higher than "inflation" are not really experiencing "inflation" if we just choose to underweight that cost in our calculations.
...so now lets play with the mathematics even more so that inflation appears to be even "less" so that we can back out even more of any commitment to adjust for the real cost of living. Why not just be at least 1% or so intellectually honest and just eliminate COLA entirely then?...that is where this appears to be heading in reality.
An argument could be made that COLA is what's driving Social Security into insolvency...
Sorry to see, Bruce, that you are one of the messengers that continues to proffer the notion that we should rob the poor and continue giving to the rich. What, no word on eliminating corporate welfare and tax breaks for the elite? Reducing and eliminating bloated government bureacracies and ending useless military actions around the world? Let's here about change we can believe in. You're losing me.
These are not mutually exclusive proposals; I applaud your effort to find $80B/yr (the amount spent less FICA collected) hidden in those corporate couches (or Cayman equivalents).
WTF? CBO did a report. I did an analysis - pro and con. This has nothing to do with military actions or robbing the poor. I'm not taking any sides with this. This was an up-and-down report on the CBO #s. Just data.
You want everything you read to be some existential mind fuck? Then don't read me. I'm good for maybe one mind fuck every year or so.
Sincerely,
Lose Me
We appreciate your columns, but it is blatantly obvious that we are going off the cliff, and even more rapidly with the ACA, so when you say something will take things off the table, which is not true at all in a larger sense(and SS is NOT tied to FICA receipts), people are going to react.
Hmm, guess this means you're NOT gonna solve my hookers and blow shortage, then. :>D
Turn yourself out. Problem solved!
So if they do a COLA adjustment will they then admitt that the entire sysytem was never designed to work long term. It was really only designed to get the politicians of the earlier day through THEIR retirement. You know....get a nice pension, a building named after you and the chance to start one of those famous name dynasties.
Bruce, you do a great service running the numbers like this, but you miss the almost catastrophic bigger picture.
“If America is going to accomplish anything with the debt/deficit issue it needs to either generate more revenue, or cut expenses”
As long as the current Bolsheviks are in charge, we both know that revenue generation will be the strategy, which will fail. Ultimately, expenses will be cut by diktat, which will lead to social unrest. The debt/deficit problem will explode, much more than now.
“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. “
Of course we were. The cost of ACA will be enormous, far higher than expected even now. My own estimates are 3x – 5x what we are currently spending. It isn’t “paid for” by any standard of that term – in fact, it will dwarf all other entitlements within a decade.
That will destroy any hope of entitlement reform, and will lead to rationing almost immediately, across multiple entitlements.
People simply do not understand how bad things are going to get in the next 2 – 3 years, never mind 10 years.
glad to see reagan and both bushes (as well as obama) classed as bolsheviks. thems the ones that run the debt up most. trying to get an objective link for this is quite hard as the websites are highly partisan. shows how virulent is the lie that there are two very different political parties doing very different things.
Agreed.
Aside from the fact that reducing COLA on SS is regressionary, and will tremendously impact the poorest among the elderly, why isn't means testing at the top of the list together with a no income limit on SS contributions? Someone should run the numbers.
Quite right. I tried to make that clear. I did say that 70% NEED the benefits and 30% don't.
That is a means test opportunity. To "fix" the regressive flaw of changing COLA a means test would be established. Another trade-off. A necessary one.
It's another piece of the puzzle. It's another "tough sale" politically. A means test is more than a tax. It is confiscating a real asset.
Why complicate an earned, pre-paid benefit system with means testing? Just remove the cap on earnings . . . if paying down the treasury debt held by the trust funds is so unthinkable.
Fine. Means test it, but don't call it social security or an entitlement. Call it by its name...welfare! And pay for it from general revenues. The whole scheme is a sham and should acknowledged to be so. Stop screwing around with the math, trying to make it sound like something its not. Its amazing how everyone freaked out about privatizing Social Security, like we were going to lose everything to the stock market. How much do we have now?Not a damned thing but empty promises. Exactly what we should have expected from lying, cheating politicians.
I always thought an entitlement is so named as it implied it was entitled because it had been paid for. Now an entitlement means you deserve it because you are breathing. Social Security is dead! Long live Welfare!
A US Govt promise is not what I'd call a "real" asset, just sayin'.
I think he's talking about the real dollars that came out of their paychecks.
Bruce - cutting anything that has already been taxed would be unfair, glad to hear you hint at that.
COLA is really insulting to anyone who has witnessed the bailouts, and continues to go to work or worked for 30+ years.
$85 billion per month in FED money to banks and bankers but they want to reduce an already pathetic COLA?
$60 million for Syrian rebels but we need to cut S.S. benefits or extend the eligibility age?
Over my dead body.
U.S.A. = Rubicon = Crossed.
Zero COLA for th epast several years and 1.6% this year (2012)? It's no wonder the old retired guy down the block is complaining he can't even afford dog food!
All while the bankers still get $85 Billion a month....Shame on the Fed. Shameful.
Meanwhile, dog food (like virtually everything else) is taxed while sales of financial products are not.
A financial transactions tax of 0.5% would raise, what, about $100 billion per year?
Sure, Wall Street wouldn't like it, particularly the HFT shops, but what's not to like about that?
It's all about paying down the federal debt!
http://www.gao.gov/special.pubs/longterm/debt/debtbasics.html
"A financial transactions tax of 0.5% would raise..."
Paid by whom?
Besides, they included something similar to that in Dodd-Frank, applied to NEW mortgages...the end user (customer) winds up paying for it...as always.
Yeah, well, Jamie Dimon is richer than him for a reason, okay?
:/
$10 bucks says you'll be complaining about the unsustainable debt within hours despite just now arguing for its continuation.
How about we don't spend $60M on Syrians, or $490M on planes for Afghans, and move the eligibility, and reduce benefits, and means test, and raise FICA taxes?
Nah, you don't actually want to solve problems, just hypocritically whine about them!
How about we claw back every penny given to any bank, corporation, or insurer along with their compensation and bonuses from the bailouts, LIBOR scandal rate riggers, Corzine, Mozillo, FED QE benefactors, Fannie/Freddie, etc. (the list is nearly endless) AND jail the malfeasant.
Then we might have something to talk about.
The perverseness of cutting already taxed entitlements after the bailouts and the FED supporting the Wall Street overcompensation bonus money ponzi scheme called "financial markets" is beyond the pale.
Our government is treasonous and utterly corrupt. To entertain notions of "shared sacrifice" and "austerity" and "doing your part" in the face of the kleptocratic despotism in Washington is an act of moral surrender, abject stupidity, gutless equivocation, or all three.
How about the people who claim to be so deeply concerned about the Federal Debt stop talking out of both sides of their mouths and start celebrating paying back $1.2T (Bruce's "Negative Cash Flow" above) of it rather than making it sound like a catastrophe that must be averted (at the expense of the elderly who prepaid those benefits)?
Look, we can pay off some of the debt!
http://www.gao.gov/special.pubs/longterm/debt/debtbasics.html
I can get behind excoriating the incorrigible and agree that equivocation is definitely a stupid moral surrender, but those entitlements shell out one TARP every year and will do that and worse until the situation is meaningfully addressed.
We have been conditioned to consider the debt and deficit to be an intractable problem by the encroached interests which stand to lose ground if that sleight of hand is exposed.
You talkses good.
Sho nuff.
Quickly bringing to mind the Mises article of yesterday...
http://www.zerohedge.com/news/2013-03-01/guest-post-ethics-repudiation
++++ Well put.
+10
but, wake me when the pricks make bail.
Cigs tax $100 per pack. Gas $100 per gal. Milk $10 per gal candy $10 per oz. Liquor $100 per oz.
Drop defined pensionstoo zero. Cut fed and state workers pay over $150k by 50% drop property tax by 50%
We need to re baseline. 10% flat tax.
Other than crippling the entire economy ($100/gal gas tax?), you're ideas seem sound. LOL
How many Fed and State workers actually make more than $150k/year? Hint: less than 2% of them. You'd achieve what...maybe $3B in savings? Only $1497B left to go!
http://4.bp.blogspot.com/_5aAsxFJOeMw/S09J8DPKYXI/AAAAAAAADAI/rRtt7QVoey...
Always amusing to see people whipping the shit out of an insignificant strawman while the 800lb gorillas (SS, Medicare, DoD) go to town on their ass. Fox News loves your support.
Awhh...3 people who can't admit that their math skills aren't up to par.
All the numbers are either hidden, off the books or lies. That makes math more difficult. Almost everything equals x. Say that there are only 22 million government employees and 110 million "provate sector"(non-union) employees. Postal workers are private sector profit-making employees even though nobody else can put anything into those mailboxes. Affirmative action janitor companies that sweep the courthouse or airport for $35 an hour instead of minimum wage are also private sector. There are a lot more affirmative action non-governmental jobs than just janitors.
So, lets say there are a lot more government workers than we think and that we'll soon find that out with federal grant cutbacks to states. If there are actually 44 million government workers and 86 million private sector workers, the fact that the government workers retire in 20 years instead of 45 means it's more like 2 workers doing each government job. More like there are 88 million government workers and 86 million private sector workers and most of the government workers don't pay into social security and collect much larger retirements. Cutting back on government retirements will never happen. The cost of the courts and decades it would take will make it easier to devalue to the dollar or allow collapse to break contracts. That's the road we're on.
All well and good, but it doesn't change the fact that the OP up there is barking up the wrong tree if what he wants is to reduce the deficit.
So is reducing colas. Inflation was 1.75% last year? I think food and energy are excluded from the calculations. Why not just tweak the inflation rate a little more rather than waste a bunch of legislative costs on reducing colas? We could base it on a basket of products like bird feathers from South America and sand from the middle east and ice from Russia. That may reduce the social security payments in the way we want without the political and legislative cost. It's another straw-man for congress to hold up and fight whilst the Titanic takes on more cold water. Gotta stay busy. It could also reduce the cost of bird feathers through subsidies and foreign aid.
Well then, grab yer assault rifle, jump on yer Hoverround™, and take out some D.C. Bureaucratz, then.
All while singing, "Hoverround takes me where I want to go"
Assault rifles tend to be noticed. Rope is your friend.
Giant string ties for greater efficiency and ease of use. Ziiiiiiiiiiiiiiiiip and walk away.
Great. Now I can't take my fucking zip ties through the airport.
Boris is have friend name Molotov. Mr. Fed, let us introduce Mr. Molotov.
might also consider taxing capital gains and carried interest at the same rate as wages. also tax unrealized capital gains at death, possibly over some threshold, if assets not subject to an estate/death tax.