Obama wants to cut Social Security. Along with most Republicans, many Democrats, and Wall Street, President Obama wants to cut Social Security. Here is what you need to know.

What Cuts Are Being Proposed?

Obama is proposing, along with the support of Republicans and many Democrats, to change how annual increases in Social Security benefits are calculated. Obama wants to switch to a different formula, called Chained CPI. This switch would result in a benefit cut of $230 billion dollars over 10 years. All this is being done under the guise of “strengthing” the program and “securing it for future generations”.

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Right now, annual increases in Social Security benefits are calculated using changes in CPI (Consumer Price Index) which measures the price increases in various goods and services. Chained CPI is a twist on regular CPI in that it assumes that when the price of one good goes up people will substitute a cheaper good. For instance, if the price of steak goes up people will switch to chicken. While this makes sense for some things, it doesn’t for others. For instance, if the price of natural gas goes up you can’t just change the heating system you have. If the prices of essential prescription drugs go, up you can’t just substitute something different.

So how much would Social Security payments change under Chained CPI? At first, it doesn’t seem like a lot. Using last year’s data, the change would amount to only $3 less for every $1,000 received. The problem is that the money lost compounds over time. If someone draws benefits at age 62, then by the time they reach age 92 they will be losing a full month of income!

The changes being proposed are an insidious way of robbing the elderly as they grow older.

What makes these proposed changes even sadder is that according to surveys[1], 84%of people believe current Social Security benefits do not provide enough income for retirees, and 75% believe we should consider raising the amount of benefits paid and 68% support an outright raise in benefits.

In Washington, both sides of the aisle are hopelessly out of touch with ordinary Americans.

Social Security Is Remarkably Effective

Social Security has been a very effective program for combating poverty among the elderly. In 2012, approximately 9.1% of the population of the US age 65 and older lived in poverty. Contrast this with a poverty rate of 21.8% for children 18 and under, or 13.7% for adults ages 18 to 64. It’s also worth noting that under a new supplemental measure of poverty created by the US Census Bureau that takes into account other sources of cash payments or benefits such as SNAP (“food stamps”) and tax credits but also includes the cash cost of healthcare not covered by Medicaid or Medicare, the poverty rate for seniors rises to 16.1%.

Since the government started keeping data on official poverty levels in 1960, the poverty rate among those 65 and older has fallen from a high of 35%. Large increases in Social Security benefits from 1959 through the 1970s contributed to a steep drop in poverty rates. Poverty rates among those 65 and older continued falling but at a more moderate pace during the 1980s, 1990s, and 2000s except during recessions.

While Social Security has done well to keep seniors out of abject poverty, it is grossly insufficient to meet all income needs in retirement. According the Social Security administration, the average retiree is receiving $1,230 per month, or about $14,760 per year.

Unfortunately, due to the recession, poverty rates have started rising. Poverty rates among children have risen from 16.2% in 2000 to 21.8% in 2012. Poverty rates for working age adults have skyrocketed from 9.6% to 13.7% during the same period. Social Security has been instrumental in keeping the same thing from happening to seniors. The poverty rate among seniors was 9.9% in 2000 compared to 9.1% in 2012. Poverty rates for seniors, however, are now starting to tick higher with 2012 seeing the largest increase in poverty rates among seniors in the last decade.

For many seniors, Social Security is their only form of income in retirement, and living on less than $15,000 a year is a challenge to say the least. While programs designed to help the less well off, such as food stamps, heating subsidies, housing vouchers, and so forth, are sometimes vilified in the press and by politicians as just lining the pockets of the lazy; in fact, a majority of the benefits dispersed in those programs accrue to children, the disabled, and the elderly. In 2012, for example, 49% of all SNAP (“food stamps”) benefits went to children, 8% went to the elderly, and 20% went to the disabled. For programs such as LIHEAP, which provides cash assistance for heating bills, virtually all benefits accrue to households that contain an elderly person, a disabled person, or a child under age six. Housing assistance programs, such as Section 8 vouchers, see a plurality of their aid go to the elderly. In 2010, 49% of all Section 8 aid went to the elderly or the disabled (versus the categories of TANF recipients [those subject to work requirements], non-TANF, and others).

The fact is a very large chunk of social benefit payments are flowing to the elderly (with children being the other large demographic). In recent years, politicians on both sides of the aisle have been making cuts to many of these programs. For example, LIHEAP was funded at $4.7B which only met a quarter of the need in 2011, but Obama proposed cutting the funding to $3B for 2012. TANF (“food stamps”) have been the target of cuts, mainly from Republicans but with plenty of help from complicit Democrats, with a $5B cut coming on November 1 of this year. (Happy Thanksgiving from Washington!) Even larger cuts are being discussed.

For seniors, Social Security remains the one stalwart program that provides income they can count on. With severe cuts coming to many programs that seniors count on, they are even more dependent on Social Security to remain out of poverty. In light of the cuts made to other programs, the proposed cuts to Social Security would be especially draconian.

It’s also worth noting that this kind of spending has a positive effect on the economy. Every dollar spent by the government on Social Security, TANF, LIHEAP, or housing vouchers generates anywhere from $1.50 to $1.80 in economic activity. By way of contrast every $1 spent on something like the military generates only around 80 cents in economic activity (and if you take a look at all the defense contractors in our investment portfolio you certainly can’t call me biased!).

Not only will cuts to Social Security harm seniors, those cuts will also harm an already fragile economy. When seniors receive less income, they spend less. Since most Social Security payments are spent on necessities, payments have a high fiscal multiplier so cuts in payments cause greater harm to the economy.

Why Cuts Are Being Proposed and How Social Security Really Works

Three words: Wall Street + taxes.

Let’s tackle the first two words: Wall Street. Wall Street desperately wants to get their hands on your Social Security money, so they can manage it. If Wall Street were managing an investment portfolio the size of the Social Security trust fund and charging a somewhat typical 1% fee, they would make $27B per year. Wall Street desperately wants to get that money under their contact, and there are two basic ways to do it.

Option one is to convince everyone that they will magically be able grow your money beyond what you might get from Social Security payouts. Given the widespread public disdain for Wall Street and the big banks, this option has little chance of success in the near term. When the stock market does well, however, such as during the beginning of the Bush years when this trick was last tried, it has a better chance of success.

Option two is more sinister but very ingenious. You simply “break” the program so it is unappealing and appears dysfunctional (never mind that you were the one who broke it). By advocating for cuts in Social Security, Wall Street can make the program appear not to be working. If the cuts are successful, you will no doubt soon hear cries of how the low level of benefits provided is just not acceptable and we need to do something. People may become frustrated with Social Security and start seriously considering an alternative. And Wall Street will be right