In the first economics course most students take, intro to microeconomics, they learn about two competing forces economists use to explain why consumers prefer one basket of goods over another: the wealth effect and the price effect. The wealth effect is the influence of income on purchases; the price effect is the influence of cost given income. If you replace the consumer with an apple cart, the wealth effect is the size of the cart and the price effect is the size of the apples. When you’re rich your cart is spacious. When the size of a Granny Smith balloons, you go for the smaller Golden Delicious. Guarding against a smaller cart is the purpose of social insurance.
When the Social Security Act became law in 1935, President Roosevelt said:
“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.
“This law, too, represents a cornerstone in a structure which is being built but is by no means complete. It is a structure intended to lessen the force of possible future depressions.”
It is not possible that Congress or the president intended Social Security to insure recipients’ standards of living no matter how deep a recession was. FDR’s remarks, however, show that the program was meant to insure, best it could, against “the vicissitudes of life.” In other words, Social Security was to guard against negative wealth effects, smaller wagons; to keep seniors out of poverty regardless of “life’s hazards.”
It is now fashionable for conservatives and some liberals (including The Washington Post‘s editorial board and President Obama) to argue for a chained CPI, a change in the way cost-of-living adjustments in Social Security benefits are calculated; the switch would reduce lifetime payments for seniors by thousands of dollars. The measure used by the Social Security Administration now accounts for some price effects within categories of goods (switching from steak to ground beef) but not across them (switching from ground beef to chicken); the chained CPI would correct for that. Some economists argue the chained CPI is the superior measure of inflation.
We should ask ourselves whether we care more about an accurate measure of inflation or the well-being of the elderly. What would FDR and the Congress who approved Social Security have said?
“A law which will give some measure of protection to the average citizen and to his family … against poverty-ridden old age.”
Do we care more about the types of apples seniors are bringing home or the size of their cart? Shouldn’t we guard against “the vicissitudes of life” as the president and Congress intended?
If proponents of the chained CPI care about accounting for the inflation seniors face, they would advocate for the CPI-E, a measure that includes seniors’ medical costs, which are close to double those of the general population. Switching to the CPI-E, however, would increase the cost of funding Social Security.
It’s best to judge a person on their actions, not what they say. President Obama, The Washington Post, and the Republican Party are unable to match their actions with their rhetoric when discussing Social Security. If they were, they would say they don’t care about maintaining a decent standard of life for seniors–they would say they think it is too high already. Instead they argue cutting Social Security is the only way to save the program, like a doctor advising you to amputate your infected finger when a bottle of penicillin is sitting right at your shoulder.
According to a new Census measure, over 15 percent of seniors live in poverty. For two-thirds of seniors Social Security makes up half their income; for a third of them it’s over 90. When they can’t afford chicken and start buying beans, President Obama and House Republicans will say, ‘It’s time to to cut their benefits!’ Is that what President Roosevelt and Congress expected of Social Security’s stewards?
FDR closed his speech after he signed the Social Security Act by saying:
“If the Senate and the House of Representatives in this long and arduous session had done nothing more than pass this Bill, the session would be regarded as historic for all time.”
Today, all income over $113,700 is exempt from the payroll tax, the source of Social Security revenue. Eliminating that cap would insure Social Security’s existence for nearly 65 years. If President Obama and House Republicans choose to cut Social Security instead, they will be remembered for snatching pennies from the poor to satisfy their wealthy friends.