Wednesday, December 12, 2012

Entin: "Leave the CPI and COLAs Out of the Budget Talks

Stephen Entin, writing for the Tax Foundation, argues that switching to the chain-weighted CPI isn’t a good fix either for Social Security or the tax code. Excessive COLAs, Entin argues (correctly) aren’t the cause of Social Security’s funding shortfalls. Moreover, Entin points out, lowering inflation-adjustment of the income tax brackets generates “bracket creep,” where a greater share of worker’s incomes fall into higher tax brackets. This would increase taxes over time without any adjustments by Congress.

I made a similar argument here.


WilliamLarsen said...

When the SS Titanic struck the iceberg it was doomed. The water flowing in was greater than the bilge pumps could pump out and ultimately it sunk. Social Security’s OASI program is no different. The size of the legacy debt (those born prior to 1940) is larger than can be paid with the current OASI tax on workers. Some would call it hemorrhaging cash without any plan to change its direction while at the same time saying they have years before there is a problem. The SS Titanic had just hours, but it was insufficient to build more life boats or for other ships to rescue those in the water.

COLA is like trying to stem the flow of water by putting your finger in the crack of the Titanic. The national Debt is paying a very low rate of interest at around 2.75% which is far greater than any reduction in COLA. As for Social Security, the COLA will be reduced to zero by statute when the OASI trust fund to expense ratio reaches 20%. So again, reducing COLA does very little.

Reducing COLA is a red herring. It misdirects focus from the root cause of Social Security’s problem; The Legacy Debt where earlier cohorts of workers paid far less in payroll taxes than was needed to pay their future benefits. This has and will always be Social Security’s problem.

Social Security is not going broke, it is broke. Greece is in the news with its austerity requirements and at the same time there are riots protesting these cuts to their social security and Medicare.

Until the US actually wakes up and can finally accept the size of the problem, we will simply continue to sink at an ever faster pace.

Arne said...

"Legacy Debt" is a meaningless mathematical construct designed to make people afraid about SS by people who don't like the idea that the government can do some things effectively.

Andrew G. Biggs said...

Arne - That's a bit ironic, since it was people like Diamond and Orszag who popularized the concept.

Arne said...


Thanks for the correction. Apparently I should have said latched onto rather than invented. As we can see, when William says "The size of the legacy debt (those born prior to 1940) is larger than can be paid with the current OASI tax on workers" he simply has his numbers wrong. (72 year olds are in no daner of losing their benefits.)