War and bankers first, Social Security retirees last
By Paul Craig Roberts
From The Trends Research Institute
Policymakers agree that consumer spending drives the U.S. economy. Yet the same policymakers, when confronted with an economy that is not recovering, appear unable to turn their attention to consumers’ inability to spend.
When will the policymakers get around to considering the devastating impact of near zero interest rates on the spending power of retirees and people dependent on investment income? With federal policies denying them interest income, American retirees are currently forced to spend-down their savings. As their wealth diminishes, so do their prospects of future earnings.
Washington has now compounded this erosion of consumer demand by denying Social Security recipients, for the second year in a row, a cost of living adjustment (COLA). According to the measure of inflation newly adopted during the Clinton administration, the U.S. economy has experienced a second year of no inflation or of insufficient inflation for a cost of living adjustment to be made.
According to the Social Security Administration, Social Security is the primary source of income for 64% of retirees and comprises 90% of the income for one-third of all retirees. The National Center for Policy Analysis estimates that Social Security accounts for virtually all of the discretionary consumption of households with modest preretirement incomes (less than $50,000 a year for couples or $25,000 for singles) and is equal to about one-third of the consumption of the highest-earning households (couples with preretirement incomes of $500,000 and singles with $250,000). Little wonder consumer demand is collapsing.
Social Security retirees are being denied a cost of living adjustment, because of the reconfigured Consumer Price Index (CPI) introduced by the Boskin Commission, formally known as the Advisory Commission to Study the Consumer Price Index. The Boskin Commission decided that the traditional way of measuring the CPI overstated inflation, thereby over-compensating Social Security retirees and adding to the US budget deficit.
The traditional way of measuring the CPI measured the weighted values of a fixed basket of goods. Thus the CPI was comparable from one year to the next.
The new way of measuring inflation replaces the fixed market basket of goods with an ever-changing basket by introducing the principle of substitution. For example, if the price of sirloin steak rises, the new CPI substitutes a cheaper cut of steak, such as round steak. If ground sirloin hamburger rises in price, the CPI substitutes ground chuck. If the cost of ground chuck rises, presumably the CPI adds in hamburger helper.
This change makes some sense, as consumers on budgets do substitute cheaper items for those that become too expensive. But as a result, the CPI no longer measures a constant standard of living. Indeed, the principle of substitution guarantees a declining standard of living. The CPI COLA formula for Social Security does not permit retirees to maintain a consistent standard of living.
For an estimate of how much Social Security retirees are short-changed by the Boskin Commission’s CPI, established in 1996, consider the inflation measures provided by statistician John Williams (shadowstats.com), who continues to calculate the CPI according to the methodologies used by the US government in 1990 and 1980. Williams reports that the current rate of inflation is 4.5% according to the 1990 methodology and 8.5% according to the 1980 methodology. Anyone who has been shopping for food and drink knows that Williams’ measures are far closer to reality than the new CPI.
The change in the CPI was expected to save $148 billion between 1996 and 2006, a sum that has been squandered many times over in the bank bailout and invasions of Iraq and Afghanistan. Treasury Secretary Hank Paulson’s bank bailout alone was five times larger than the projected ten-year savings resulting from stiffing Social Security retirees. According to economist Joseph Stiglitz and budget expert Lina Bilmes, the cost to Americans of the Iraq war was 20 times that of the “savings” realized from bilking Social Security recipients for a decade. The cost of the Afghan war, now in its 10th year, promises to be even higher.
The U.S. government has, thus, made it completely clear that retirees count for nothing against the interests of the big banks and the military/security complex, which are rolling in record profits while retirees sink into poverty. Reuters reported on October 12 that three dozen top banks and securities firms will pay a record $144 billion in salary and bonuses this year. Employees of merely 36 financial institutions are due annual pay equal to the sum stolen from Social Security retirees over ten years by a reconfigured CPI designed to minimize the cost of living adjustment.
These hard facts make it clear whose interests the U.S. government really represents.
