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Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

February 18th, 2010 2:05 PM

Alan Simpson: A Man Who Intensely Wants to Cut Social Security

It is not good news that President Obama picked former Senator Alan Simpson as one of the co-chairs of his deficit commission. Simpson is not just your run of the mill Republican. He is an extreme foe of Social Security.

One anecdote from his days as a senator should give a flavor of his hatred for the program. Back then, the preferred method for cutting Social Security among the Washington elite was to claim that the consumer price index (CPI) overstated the true rate of inflation. This matters for Social Security because the annual cost of living adjustment (COLA) is based on the CPI. If the CPI was overstating the true rate of inflation, the DC elite argued that we were overcompensating Social Security beneficiaries.

The plan was to cut the size of the annual COLA to 1 percentage point less than the CPI. This may sound trivial, but it would add up over time. Someone who was retired 5 years would see their benefits cut by roughly 5 percent, 10 years by 10 percent, and 20 years by 20 percent. This is real money.

There were two basic problems with the story. The first is that there was not much evidence for the claim and much of the evidence that did exist was 30 years old at that point. Usually economists like to base important policy decisions on more substantive and recent evidence.

The other problem was a logical one. If the CPI really overstated inflation then people were getting wealthier much quicker than anyone could imagine. The point here is simple. If nominal wages rise by 4 percent and the CPI shows a rate of inflation that is 3 percent, then real wages are rising 1 percent a year. However, if the CPI overstates the true rate of inflation by 1 percentage point, then the true rate of inflation is just 2 percent. This means that real wages are rising by 2 percent a year. If this is true, then our children will be far richer than anyone could imagine. This also means that our grandparents grew up in poverty, since if real wages have been rising much more rapidly than the official data show, then people were poorer in the recent past than implied by the official data.

This point is about as simple and straightforward as it gets. That is why I was very impressed to be on a radio who with Senator Simpson, who was arguing that we absolutely had to reduce the annual COLA by at least 1 percentage point below the rate of inflation shown by the CPI.

Simpson wasn't content to argue that the CPI overstated inflation by 1 percentage point. He told listeners that many economists tell him that the overstatement is at least 1.5 percentage points and that some tell him that the overstatement could even be as much as 2 percentage points. He then told listeners that soon our grandchildren will be living in chicken coops.

Of course the logic runs the other way. If Mr. Simpson's economists were correct and the CPI overstates the annual inflation rate by 2 percentage points then we are getting richer at a fantastic pace. (4 percent nominal wage growth would translate into 3 percent real wage growth in the story above.) This would mean that our grandchildren will be hugely wealthier than we are and that the current generation of Social Security beneficiaries grew up in extreme poverty. Why would anyone want to cut benefits for people who grew up in poverty to make our rich grandchildren even richer.

But, Senator Simpson didn't care about logic, his agenda was cutting Social Security. And that is who President Obama picked to co-chair his deficit commission.

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