Sunday, April 7, 2013

Adding Insult to Injury: The President’s Social Security Proposal

Adding Insult to Injury: The President’s Social Security Proposal

If you collect social security, you’ve become a bargaining chip in President’s Obama’s attempt to lure Republicans into a long-term budget agreement.  The President is proposing a change in the calculation of the cost-of-living adjustment that will reduce the annual increase in benefits.  If the Republicans had already agreed to some major change in our tax code, this might perhaps be an appropriate step.   Now that the President has conceded this point, the Republicans will ask for more.  Moreover, a change in COLA calculation doesn’t do a thing to balance the budget anytime in the next decade since social security is still in surplus, and isn’t part of the general budget.
NC Botanical Garden (2013)
What makes this proposal even more egregious is that senior citizens have borne the brunt of the low interest rate environment made necessary because Congress has been unwilling to stimulate the economy.  The Federal Reserve has had to keep interest rates at nearly zero and engage in a couple of rounds of quantitative easing (buying up debt) in order to overcome the economic drag produced by our inept Congress.

Senior citizens, of course, are highly dependent on fixed income investments.  Typically, they hold 65% or more of any savings in bonds, CDs, or other income producing investments.  As a result, the elderly have seen their income drop year after year for the past decade.  For example, if a senior citizen purchased a 5-year US treasury in 2000, they earned about 6.3%.  If they rolled that investment into a new note in 2005, they received interest of 3.7%.  And when the note matured in 2010, the interest rate was down to about 1.5%.  Today that same bond would yield only 0.7%.  try maintaining your standard of living as your bond portfolio drops from 6.3% to 0.7%.  I bet you’d be eating into your principal to make ends meet.

In order to maintain their incomes, the elderly will either be required to remain in the work force or take more risk with their savings.  Of course, these choices only apply to those people who are still able to work or still have money in their investment accounts. Since Congress enacted Social Security in 1935, poverty among of the elderly has declined dramatically.  With interest rates near zero and President Obama prepared to pare social security benefits, we’re getting ready to start a new trend at the expense of senior citizens.

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