© Josh Sager – October 2013

For much of his time in office, President Obama has pursued a “grand bargain” with Republicans which would allow both parties to achieve some of their most-coveted goals, but would require both to make major concessions.

Ultimately, a grand bargain has not come close to passing in recent years—despite the Obama administration efforts—because the right edge of the Republicans have refused to budge an inch on taxes. This refusal to make tax-increase concessions by those on the right has prevented even a deal which gives incredible concessions to the Republicans from becoming politically viable. Very little has changed in regard to the current gridlock of Washington, thus such an expansive deal is unlikely, but it appears that the Obama administration is winding up for another attempt.

Unfortunately, any “grand bargain” deal between Obama and the Republicans in this political environment will almost certainly include entitlement cuts. Such cuts are a long-standing goal of the GOP and may be politically palatable concessions to the Obama administration, but they are damaging to the country and will result in very real pain being inflicted on vulnerable Americans.

The Great Robbery

If entitlements are cut in service to a partisan deal, it will represent the single largest robbery in the history of this country.

Social Security and Medicare are funded through dedicated revenue streams and any raid on their trusts is a direct theft of funds from the American people. The money in those trusts was collected from American workers and invested in long-term bonds with the promise that the workers would get a certain level of benefits once they reached a certain age—taking that money is a breach of contract with American workers just as severe as any other scheme to defraud.

In fact, these cuts would turn entitlements from stable social insurance programs into literal Ponzi schemes. Both entitlement programs and Ponzi schemes use the money of current “investors” in order to pay for the benefits of those who have already paid into the program—the main economic difference between the two is that entitlements have a steady stream of new “investors” to prevent the program from collapsing and leaving investors in poverty. If entitlement benefits are cut in a “grand bargain,” the program will stop paying out what was promised to its investors and the difference between the promise and the reality will be syphoned out to service external debts.

Basically, cuts to entitlements would create a situation where the government could claim the money that they saved as “deficit reduction,” regardless of the fact that they stole that money from the most needy American citizens.

The “Grand Bargain”

While the specifics of the “grand bargain” have changed over the past few years, the general demands/concessions made by both parties remain virtually static—the Republicans want cuts to social programs and entitlements, coupled with decreases in corporate tax rates, while the Obama administration wants tax increases and infrastructure stimulus.

In the past, the Obama administration has attempted to find a middle-ground between the two parties’ demands which would incorporate all of the partisan demands into one highly expansive bill: Republicans would receive significant cuts to entitlements, corporate tax rates, and social programs, while Democrats would receive increases to top-marginal tax rates, and infrastructure spending, coupled with the removal of some tax loopholes.

In short, such a deal would give everybody in Washington a trophy to bring home to their constituents, while allowing them to blame the negatives of the bill on their political opposition.

It is virtually inconceivable that a grand bargain could occur that leaves entitlements unscathed, as it is the most powerful bargaining chip of the Democrats and the most coveted goal of the current right wing—that said, there are several ways that entitlement cuts could manifest.

Chained CPI

A shift from using the consumer price index (CPI) to calculate defined benefits for Social Security to using the “chained consumer price index” is one way that entitlements could be robbed. Long story short, the chained CPI grows slower than the current CPI calculation, thus shifting to the chained CPI would slowly reduce how much Social Security beneficiaries will be paid

According to estimates, the growth in benefits after a shift to chained CPI would decrease by 0.25% every year.

After 10 years, this means that social security beneficiaries would be given 2.5% less.

After 20 years, they would get 5% less.

After 50 years, benefits would be cut by 12.5%.

Over the decades, these cuts will accrue and Social Security will become less effective in keeping people out of poverty.  

During several previous negotiations (ex. in the first 2013 debt ceiling fight) President Obama supported shifting to chained CPI if the Republicans would capitulate to his demands. This willingness to support the chained CPI cuts in the past makes it highly likely that this is will be one of several entitlement cuts included in any potential future “grand bargain.”

Eligibility Age Increases

Because people are only able to claim entitlement benefits after a certain age, an easy method of cutting entitlement programs is to increase the eligibility ages for the programs. If people are eligible for social security later in life, they will have fewer years on the program, thus will take less money from the social security trust.

Currently, American workers are eligible for Medicare at age 65 and full Social Security benefits at 67. Every year that an American doesn’t have access to their Social Security and Medicare is a year during which they must pay for their needs out of pocket, thus any increase in eligibility age is a direct cut to entitlement benefits.

According to the Social Security trust accountants, the average American retiree received a monthly benefit payment of $1,224.69 as of August 2013—these benefits add up to a total yearly retirement income of approximately $14,696.

Every year to be added to the retirement age takes money out of the pockets of the Americans who would have otherwise been able to retire. For example: If the retirement age was raised by two years, every American senior would be forced to forego two years of benefits (equivalent to $29,400 in benefits, as calculated for 2013) in order to receive full retirement payments.

Extrapolated over the millions of Americans who will one day claim retirement, even a single year increase in the retirement age will take gigantic amounts of money away from elderly Americans—in particular, these cuts would be concentrated on less-wealthy Americans, who rely on the programs more than the rich for retirement.

Medicare eligibility age increases have identical cutting effects to Social Security eligibility age increases, but through a slightly different mechanism. Rather than decreasing benefits, increases to the Medicare eligibility age force Americans into the expensive private insurance market or even prevent them from getting coverage. Regardless of whether Americans are able to buy private coverage or are forced to live without care, increases to the eligibility age will cost American seniors large amounts of money.

Conclusion

Americans need to realize that Washington politicians may soon eviscerate their entitlement programs in service to a partisan deal. This deal may allow both Democrats and Republicans to score rhetorical and political points, but it will cause immense harm to the American public in the long-term. We must fight back against any “grand bargain” which attacks entitlements and robs the American people of the benefits that they earned over decades of hard work.

Discussions about “chained CPI” shifts or “eligibility age” increases may sound arcane and complex, but they are, in fact, very simple—both are debates about whether or not politicians will rob you of portions of your retirement.

Unless you are willing stand idle as you, and your fellow Americans, are robbed, you must stand up and let Washington know that you know what is going on and will do everything in your power to vote them out of office if they are complicit in this robbery. Any politician, regardless of partisan affiliation, who votes for cuts to Social Security and Medicare should face a primary and serious electoral backlash during their next election.

It is certainly true that entitlements will one day need to be reformed for them to remain stable, but that day is far off and there are far better ways fix our entitlements than robbing needy beneficiaries. For example, removing the payroll contribution cap would make Social Security solvent until the end of time, while only taking from those who could afford it, and would do so without cutting a single cent in benefits.