President Bush’s Social Security proposals raise an interesting question: When is a cut a cut? Advocates of his approach assert their plan would merely slow the growth of benefits. Critics talk about large cuts in benefits. Who is right?
To answer that, look at the ways the word cut is used in government finance. With the state legislature in session, one hears references to “cuts” in one program or another nearly every day.
The average citizen might think that a “cut” inherently means a reduction in spending in absolute terms. That is, we are spending $10 million on some program in 2005 and we are going to spend only $9.5 million next year. This is a cut of 5 percent and a reduction in actual dollars paid out.
Often however, the “cut” is a relative one, measured from what would be necessary to keep up with inflation. Consider the same $10 million program. If inflation is 5 percent a year, some argue, $10.5 million is needed next year just to keep up with inflation. If we spend the same $10 million this year as last, it is a cut of a half-million dollars when adjusted for inflation. Even increasing actual outlays to $10.2 million would cause a cut of $300,000 in real buying power under this definition.
A third definition of “cut” is the reduction from spending needed to maintain some current level of services. Consider a program that reimburses medical procedures for people over age 65. It costs $10 million this year.
Next year, health care providers increase charges for these procedures by six percent. Moreover, the number of eligible people increases by four percent.
We would have to spend $11,024,000 to provide the same level of services next years as this year. An appropriation of $10,500,000 would represent a “cut” of some 4.7 percent under this definition, even though the absolute number of dollars increased.
Now let’s return to the president’s proposals. When Mr. Bush says that under his plan, no future set of retirees would get less in real buying power than current retirees, he is correct.
Most future retirees would get checks that would purchase more real goods and services than comparable retirees get now. Buying power would not drop even for the higher-income group most affected by his proposed changes. So, if we define cuts in terms of absolute dollars and inflation-adjusted dollars, the president’s plan contains no cuts.
On the other hand, more than two-thirds of future retirees would get less under the president’s plan than they would if the current benefit formula did not change. His proposals are cuts analogous to the cuts from the third definition, the current level of services.
Under the president’s proposal, most retirees would receive a smaller proportion of their earnings over their lifetime as benefits than current recipients do. And on average, their checks will look smaller, compared with the earnings of those still working, than those of Social Security recipients today. You decide whether these are cuts or not.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.