Is Obama About to Sell Out Social Security? The Political Fallout Would Be Devastating

Posted December 16th, 2010 in Updates and tagged , , , , by Hands Off Our Medicare

By Robert Kuttner

Obama has signaled that he might include Social Security cuts as part of a grand deficit-reduction deal. If that occurs, expect civil war among the Democrats.

If you think the Democratic base is mad at Obama now for making a craven deal with Republicans that continues tax breaks for the richest Americans and adds new ones for their heirs through a big cut in the estate tax, just wait a few weeks until Obama caves on Social Security.

How will this occur? The deficit commission appointed by the President has called for an increase in the retirement age, as well as other cuts in benefits over time. And the deal that Obama made with the Republicans just gave deficit hawks new ammunition by increasing the projected deficit by nearly $900 billion over a decade. Social Security will be in the cross-hairs.

The deficit commission has tried to camouflage these cuts by emphasizing that Social Security benefits for the very poor would not be reduced, and might even be increased. But in the commission’s proposal, the cuts would affect middle-class retirees. Larry Summers, who is stepping down as Obama’s economic chief, has refused to rule out cuts.

Social Security has also been softened up by the element of the tax deal that temporarily cuts payroll taxes. Supposedly, the trust funds will be made whole by a transfer from general government funds. But this increases the deficit.

So Obama has created a kind of pincer attack on Social Security. One arm is the deficit commission, which has created the blueprint. The other is the tax-cut deal, which increases the deficit, adding to the artificial hysteria that Social Security is going broke. Meanwhile, the right is playing a very cute game, congratulating Obama for the deal. According to columnist Charles Krauthammer, writing in Friday’s Washington Post, “Barack Obama won the great tax-cut showdown of 2010.” Really? How did he do that? It sure looked like he got rolled. “The President negotiated the biggest stimulus in American history, larger than the 814 $billion 2009 stimulus package.”

The New York Times’ resident right-wing pundit, David Brooks, also writing Friday, was peddling the same line:

“The fact is, Obama and the Democrats have had an excellent week,” Brooks wrote. “The White House negotiators did an outstanding job for their side.”

When the right congratulates Obama for winning, you know he is losing. For starters, the proposed compromise isn’t much of an economic stimulus. If the deal passes Congress, taxpayers will be paying the same income tax rates in 2011 and 2012 as in 2010. No stimulus there.

The only real stimulus is the temporary cut in Social Security taxes, the extension of unemployment insurance plus a few minor tax breaks for regular people, totaling about $200 billion. That’s a little more than one percent of a $15 trillion economy. Pretty puny, certainly a lot smaller than the inadequate stimulus of February 2009 when the recession was only beginning to deepen.

Except for the extension of unemployment insurance, which should be done out of common decency, most of the “stimulus” is pure Republican ideology — stimulate the economy by cutting taxes. If that had worked, the huge tax cuts of the Bush years would have kept the economy out of recession.

There is not a nickel of public investment or direct job creation in this proposed deal. And it is well recognized by economists that in a recession, temporary tax cuts, especially tax cuts tilted to the rich, provide far less bang for the buck than public investment.

If Obama had fought for a deal that restored Clinton-era tax rates on the richest two percent of the population, and used the revenue for direct investment and job creation, that would have been a stimulus worth celebrating. And doubtless, commentators like Krauthammer and Brooks would be condemning it.

Because the Congressional Budget Office assumed that all the Bush tax cuts would expire on December 31, 2010, the tax-cut deal creates a new budgetary reality. Suddenly, the ten-year deficit will be almost $900 billion larger than projected.

This, in turn, will give new ammunition to the deficit hawks. And here is where Obama has set up Social Security to take the hit, unless he drastically shifts ground.

The supposed crisis of Social Security is a phony. Social Security is financed by payroll taxes. Reduce unemployment, increase wages, and the crisis disappears. Even with only modestly better unemployment rates and wage growth, the modest projected shortfall could be eliminated by eliminating the cap on income subject to tax.

A Democratic president with strong progressive principles and political nerve would have taken his party into the mid-term election pledging never to cut Social Security and daring Republicans to take a similar pledge. Instead, Obama appointed a deficit commission with a majority of appointees wanting to cut the Democrats’ signature program — thus blurring party differences on the Democrats’ biggest political winner.

Obama also signaled Democrats in Congress that he might well include Social Security cuts as part of a grand deficit-reduction deal. If that occurs, the civil war in the Democratic Party will only deepen.

Coda: The other day, I was part of a conversation in which the question came up: If Democrats in Congress do hold their noses and vote for the tax-cut deal in order to prevent unemployment benefits from being cut off on Christmas, what might they ask of Obama in return? There is not a great deal that he can deliver legislatively, unless he decides to get serious about wielding his veto pen.

The best idea to emerge was this: Democrats should demand, in return for their aye votes, that Obama appoint Elizabeth Warren to chair the National Economic Council, to succeed the departing Larry Summers. Warren is the one senior administration official who has not stopped fighting to protect regular Americans. She is not a Ph.D economist, but neither was the man for whom the Council was created, its first head, Robert Rubin. Nor was Rubin’s successor, Gene Sperling.

According to press reports, the man about to get the job is Roger Altman, an investment banker and former deputy to Rubin. Altman has been to the White House at least three times in recent weeks, and his appointment seems all teed up. Altman would continue the Wall Street dynasty around Obama — the very gang whose reckless deregulation and speculation brought us the economic collapse whose damage is now being used to justify wrecking Social Security.

Getting Warren instead of Altman would almost justify voting for this stinker of a tax deal. Maybe Warren could even get Obama to think twice about the political and economic wisdom of throwing Social Security on the pyre of deficit reduction.

Robert Kuttner is the author of A Presidency in Peril: The Inside Story of Obama’s Promise, Wall Street’s Power, and the Struggle to Control our Economic Future, recently published by Chelsea Green Publishing Company. Kuttner also authored Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency and several other books on politics and the economy. He is coeditor of The American Prospect magazine and a Distinguished Senior Fellow at the progressive think tank Demos. He is a regular commentator on TV and radio, and a contributor to The Huffington Post and The Boston Globe, and a former longtime columnist for BusinessWeek. Previously, he was chief investigator of the U.S. Senate Banking Committee and a national staff writer on The Washington Post.

2 Responses so far.

  1. Yes, we know that the educational system is failing us, that many eleventh-graders can’t read adequately. But many older people were better educated, and still know how to read. We don’t ALL get our news filtered through Glen Beck. Many of us are still able to reason. We know that Social Security is paid for through payroll taxes. Those receiving Social Security now, paid into the fund for many years. We also know the fund that guaranteed our benefits has been tapped into by the government for operating expenses, instead of being put into a “lock box” for retirees as Al Gore urged it to be. There are IOUs out there for the money borrowed from the fund. People can be informed, and will understand what has happened. Some the money the government is spending was NOT borrowed fom China: some was borrowed from us. If you go backwards on programs designed to take care the most vulnerable of us–and the many who rely on Social Security for dignity in their waning years–I guarantee you there will be a revolution that will astonish observers worldwide. You think our country got bad press shooting college students during the sixties? Try to imagine police in riot gear firing on gray-haired grannies and grandpas.

  2. Robert Archibald McDonald Sr. says:

    Isn’t it true that they say Social Security is going broke. This I do not understandas I have been payingh into it since 1940 and have been drawing from it since 1988 and still paying into it. I also understand that our Congress and our President have included in the SS Fund illegals that have not paid s dime into the fund but stand to be able to draw from it. Also the SS monies have for years been drawn from the fund to pay for some of the pet projects of our Gongress personnel. Now isn’t that where the monies have gone?