With a little sleight of hand in how the government calculates inflation, the Obama budget 2014 released today (Wednesday) proposes to both raise taxes on the middle class and reduce future payments to Social Security recipients.
That’s quite a reversal coming from a Democratic president who had promised to protect the American middle class.
In the past, U.S. President Barack Obama has focused his desire to raise more federal revenue on the rich, who he has repeatedly said “need to pay their fair share.”
But the reality is that the wealthy citizens of the United States don’t have nearly enough money – even if all of it were taxed – to solve America’s many fiscal problems.
Practically speaking, there are only two ways to attack the trillion-dollar deficits that have plagued the country: massive spending cuts or massive tax hikes on the middle class.
The Obama budget 2014 offers some token reductions, but putting the middle class in the budget crosshairs is a new and ominous White House strategy.
“While it’s not my ideal plan to further reduce the deficit, it’s a compromise I’m willing to accept,” President Obama said on Saturday in his weekly address.
Oh, and don’t expect much resistance from the Republicans on this, despite their historic opposition to tax increases. Last year, it was Republican leaders talking up the need to adjust the Consumer Price Index (CPI).
The Stealthy Thievery in the Obama Budget 2014
Taking more money from the struggling American middle class is bad enough, but the way the Obama budget proposes to do it is downright sneaky.
The government started tinkering with the CPI as far back as the mid-1980s in what it claimed to be a better reflection of inflation, but in fact merely served to mask how fast prices were actually rising.
The idea was that consumers changed their buying habits in response to higher prices, and so were less affected by inflation.
Instead of measuring how much money a person needed to afford a steak, the new adjustments assumed the person would switch to a cheaper form of beef, like a chuck roast or hamburger.
The new “chained” CPI in the Obama budget 2014 takes that a step further and assumes a consumer switch to an entirely different, less expensive product – like macaroni and cheese.
The upshot is that it lowers the CPI number, which is used to calculate the annual cost-of-living increase in Social Security benefits. Over time, it adds up to a lot of money that will come out of the pockets of retirees.
The AARP has created a chart that shows just how much the change would cost a person in their “golden years.”
A retiree who stared out receiving $14,838 in benefits at age 62 would see a 2.9% decrease in benefits by age 72, a 5.7% decrease by age 82, and an 8.4% decrease by age 92.
A typical worker retiring at age 65 would lose $650 a year by age 75, a number that would grow to $1,130 a year by age 85.
Middle-class workers will get hit by the Obama budget if the chained CPI is applied to income tax brackets, which would result in incomes rising faster than the tax bracket thresholds.
People would move into higher tax brackets more quickly, increasing what they owe Uncle Sam.
The Congressional Joint Committee on Taxation has determined 69% of the gains from using chained CPI for income tax brackets would come from Americans making $100,000 or less – the middle class.
Obama Budget 2014 Hits Those Who Can Least Afford It
This double whammy to fixed-income seniors and middle-class workers will pick the pockets of two groups already having a tough time financially.
Middle-class workers are still trying to cope with January’s 2% payroll tax increase. And that came on top of four years of declining income – according to census data, median household income fell by $3,850 a year from 2009 to 2012.
Retirees, now and in the future, will struggle to live on lower incomes. And unlike some proposals to “fix” Social Security, the chained CPI plan would affect seniors now, so there’s no opportunity to plan for the change.
“What’s so surprising about the momentum behind chained CPI is it’s the only time anyone has put on the table a cut to current benefits for deficit reduction,” Cristina Martin Firvida, the director of financial security at AARP, told Business Insider. “It’s not a phase-in. You’re already retired.”
According to the National Academy of Social Insurance, about a third of seniors depend on Social Security for 90% of their income; two-thirds depend on it for more than half of their income.
Future retirees, particularly Baby Boomers, may miss that income even more. In a recent survey by TD Ameritrade, 74% of boomers said they would need to “rely heavily” on Social Security in retirement.
Ultimately, the Obama budget 2014 proposal to use chained CPI is simply a backdoor way to try to address Washington’s out-of-control spending on the backs of the middle class and especially senior citizens.
“We will have to work a lot longer and get by with less,” Olivia Mitchell, professor of economics and executive director of Pension Research Council at Wharton School of Business, told USA Today.
By DAVID ZEILER, Associate Editor, Money Morning
April 10, 2013