A Scheme to Cut Social Security?

Don't look now, but a handful of economists and politicians have devised a scheme to cut billions of dollars out of Social Security payments and raise taxes, while pretending they are just correcting an "error" in government statistics. The print is small, the methodology arcane, and the arguments boring enough to the general public that they might just pull it off.

Here's the plan: If it can be shown that the Consumer Price Index (CPI) overstates inflation, then the cost-of-living adjustment for senior citizens receiving Social Security can be cut. At the same time taxes would go up, because the tax brackets that determine federal income tax rates are indexed to inflation. A lower measured inflation rate would put more people in higher tax brackets.

The plan got a big boost last week with the report of a commission of economists appointed by Congress that the CPI may overstate inflation by 1.1 percentage points.

For the average Social Security recipient, the new measure would mean about $96 less this year in cost-of-living increase. This difference would grow every year. In a few years, the change would cost the average retiree several hundred dollars per year; in 15 years it would be thousands.

But is the commission's report true? One way of testing new discoveries is to see how well they fit with what we already know about the world. If our most commonly used measure of inflation is this far off the mark, then what are the implications for our understanding of the economy?

Dean Baker of the Economic Policy Institute has looked at this question by accepting at face value the sources of overestimation alleged by the commission, and projecting them into the past. The implications are that real income has grown much more rapidly in the past few decades than has been previously recorded. In other words, we were really poor back in the '50s and '60s - we just didn't know it. If the economists' new discoveries about the CPI are true, then most of the US population was living near or below the poverty level in 1960. If we go back to 1953, the overwhelming majority of the country was way below the poverty level.

It's a tough story to swallow, even for those who weren't around to experience this hitherto unnoticed poverty. For example, in 1960, 57 percent of all families were homeowners and 76 percent owned cars. But the past is only one half of their real problem. If inflation is much lower than economists thought it was, then real wages are currently growing much faster than we thought. So fast, in fact, that they will double over the next 33 years.

In other words, the new numbers portend a future that is as astoundingly bright as the reconstructed past was bleak. This makes it even more difficult to justify cutting Social Security and raising taxes for generations that suffered through crushing poverty, only to protect the future bounty of the fortunate generations that will reap the social returns of their grandparents' deprivation and thrift.

All of this illustrates the need to insulate the process of gathering basic economic statistics from the political pressures of the moment. If there really is something wrong with the CPI, then the Bureau of Labor Statistics, which produces the index, ought to fix it.

But until someone can reconcile the commission's results with what we already know about the economy, there is no reason for Congress or the Clinton administration to believe that the CPI really needs fixing. Unless, of course, they just want to cut Social Security and raise taxes without getting blamed for it.

*Mark Weisbrot is research director at the Preamble Center for Public Policy and a research associate at the Economic Policy Institute in Washington.