CPI Shaving?

Max Sawicky sawicky at epinet.org
Sun Sep 20 12:14:17 PDT 1998

It should be noted that the CPI adjustment, which did originate within the BLS, subject to the external pressures Brad notes, reduces the actuarial shortfall in the Social Security trust fund. The summary number was 2.1 and now it is more like 1.8. That means 1.8% of taxable payroll channeled into the fund starting today, in the form of either tax increases or benefit cuts, eliminates the 75 year shortfall.

Further adjustments, which are likely, will reduce the shortfall more. This doesn't prevent some people, present company excepted, from saying, simultaneously, that the Trust Fund is in trouble and the CPI is way overstated.

The Administration's latest projections are that a unified budget surplus persists until FY2055 (that's right, for the next half- century). In this light, the mere dedication of some general revenue to the trust fund obviates any need whatsoever to do anything about Social Security for thirty years. No tax or benefit changes are needed. Once again, people who say the Trust Fund is a fiction also gear their policy proposals to fixing the actuarial gap in the Fund.

> But it *is* the case that 95-year-old widows are being asked to sacrifice
> the most, that other program beneficiaries are being asked to sacrifice,
> that rich people who find themselves paying more of their income in higher
> brackets are being asked to sacrifice, and that bondholders aren't being
> asked to sacrifice at all.

The point about a dual effect on taxes (up) and benefits (down) is undercut by the legislative reality that taxes on the rich are 'sticky upward,' to borrow a phrase. As we speak, tax cuts for the rich are being brewed. Benefit cuts are no political piece of cake either, but a fait accompli on the CPI in the nature of 'CPI-1' appears more durable than a prospective tax increase.

EPI has a paper by Howard Chernick and Ed Wolff on the effect of CPI reduction on benefits.

> But if you are a country with a large national debt relying on
> internationally-mobile foreign capital to finance a large chunk
> of it, that
> seems to be the way it is. As Charles Schultze once said in 1993,
> comparing
> economic policy then to policy under the Carter administration: "Gee.
> Things are really different when your debt-to-GDP ratio is 50% rather than
> 20%..."

By current projections this ratio is supposed to fall below 30 once again. If we have gone on as well as we have with a ratio of 50, why bother trying to reduce it below 30? Why not settle on somewhere between 40 and 50 indefinitely?

The driving element in all the fiscal prescriptions, whether the projections for the budget or the trust fund are good or bad, in fair weather or foul, is the political interest in shrinking the public sector and expanding deflationary pressure. The underlying economic model of growth that supports this seems to be implicitly pre-Keynesian. The liberal dimension of Keynesian policy -- a short-term focus on employment -- seems to be operationally undone by open-economy considerations. How much of this is founded on politics, as opposed to the merits of the case?


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