TSCL Fights Greenspan Cuts

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TSCL Fights Greenspan Cuts

Recently Federal Reserve Chairman, Alan Greenspan urged Congress to cut Social Security benefits. In a cryptically worded statement — the type Greenspan is famous for using — he told the Senate Banking Committee that linking initial retirement benefits to prices rather than to wages, as is currently done to calculate retirement benefits, could wipe out Social Security’s entire long-term shortfall. He also noted that the drawback of that idea would be that initial benefits of retirees would represent a much smaller proportion of their average monthly wages while working.

This is “Greenspanese.” What Mr. Greenspan is talking about is big benefit cuts — for today’s retirees as well as our future ones. Mr. Greenspan’s proposal is complex, but in technical terms he wants to introduce price indexing to the Social Security benefit formula. This would require Congress to specify the Consumer Price Index (CPI) to be used to index Social Security. The CPI would be used for calculating both initial benefits as well as the annual Cost of Living Adjustment (COLA). In the past, Congress has used the most slowly-growing index for calculating COLAs. Today there’s a new “chained” CPI that grows even more slowly than the CPI that’s currently used to calculate the annual increase.

The “chained” CPI would likely cut the annual COLA by about 14% based on a study of available data from the Bureau of Labor Statistics, by Advisor editor, Mary Johnson. The effect of such a cut compounds over time. A 65-year-old who retired with an average benefit of $852 in 2001, for example would, by age 85, receive an estimated benefit that’s $74 per month less than he would get under currently scheduled estimated COLAs.

TSCL is fighting this proposal tooth and nail. Over the past eight years, Mr. Greenspan has repeatedly urged Congress to adopt the “chained” index, saying in 1997, “ there is almost a 100 percent probability that we are overcompensating the average Social Security recipient for increases in the cost of living.”

The proposal to introduce price indexing to the benefit formula would cut benefits for future retirees by as much as 50% by some estimates. According to the Congressional Budget Office, this is far more than would be needed to make up for Social Security’s financing shortfalls. TSCL is reviewing alternatives that would more equitably spread the cost of improving Social Security’s long-term solvency while protecting the benefits of current retirees.

Sources: “Greenspan Sees Medicare Crunch,” The Wall Street Journal, February 17, 2005. Testimony of Alan Greenspan on the Consumer Price Index Before the Committee on Finance, United States Senate, January 30, 1997. “Competing Visions For Social Security,” Jonathan Weisman, The Washington Post, February 24, 2005. “2005 Chained CPI Study,” Retiree With Average Benefit of $852, Mary Johnson, TSCL, February 14, 2005.