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Social Security: Can Democrats Save Obama From Himself?

The plan to cut Social Security will destroy any hope of recovery.
 
 
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President Obama picked the very day that new job creation collapsed to propose a deflationary budget deal featuring cuts in Social Security and Medicare. This is perverse economics and worse politics, on several grounds.

The economy created just 88,000 jobs in March, down from close to 200,000 in other recent months, for one main reason: The January 2 budget deal and the March 1 sequester that hiked taxes on working people and cut public spending.

In the January deal, payroll taxes on working people were raised by some $120 billion. The more highly publicized tax hike on the top one percent raised less than $65 billion. The sequester added another $85 billion of budget cuts. The combined economic contraction will be about $270 billion this year, and according to the Congressional Budget Office the result will be to cut economic growth roughly in half.

But the deal that Obama is trying to coax the Republicans into accepting would cut the budget at this rate for an entire decade. The economics are just insane. There is no evidence that banks are waiting to lower interest rates (which are already rock bottom) or businesses waiting to invest, pending progress on a grand budget bargain. Businesses are hesitating to invest because customers don't have money in their pockets -- and a deflationary budget deal will only make the economy worse.

The politics are worse than the economics. President Obama, violating every rule of smart negotiating, has put his final proposal on the table -- cuts in Social Security and Medicare in exchange for the Republicans' (still imaginary) agreement to raise taxes -- before the Republicans have made a single concession.

The Republican habit is well-established -- take Obama's "final" offer as the new starting point and demand further concessions. With this strategy, our president has let them take him to the cleaners for more than four years now, and is still hoping that sweet reasonableness will produce compromise. It never has and never will.

The worst part of all may be the president's offer to cut Social Security, using the sneaky, backdoor method of reducing the annual cost of living adjustment, disguised as a technical change, wink-wink, nod-nod.

The gimmick is "chain-weighting" the consumer price index. The premise is that the CPI overstates inflation because when prices rise, people find cheaper substitutes. There are two problems with this. First, hard-pressed consumers indeed find ways to pinch pennies, but cat food isn't Chicken of the Sea. Second, old folks actually face higher inflation than the rest of us because they spend so much of their budget on health care, whose costs are rising faster than other goods. The elderly are also suffering from the rock bottom interest rates that the Fed is using to keep the economy on life supports -- which translate into very low returns on savings.

If Democrats stand for anything, it is defense of Social Security and Medicare -- America's two most broadly beneficial and most beloved government programs -- and the president just gave away this last bit of product differentiation. You have to wonder where he is getting his advice. (Bob Rubin, maybe?)

Social Security benefits should be increased, not cut. The share of workers with traditional pensions is down to about 15 percent. The rest either have no pensions or have 401k plans that are not pensions at all. 401k's, like IRAs and Keoghs, are tax-sheltered savings plans. More than half of people between 55 and 64 have no pension and no retirement plan at all other than Social Security.