Recovery Built on Retirees' Backs

So Greenspan urged Congress to cut benefits rather than raise taxes, a cynical ploy because we all know Congress has no appetite for increasing taxes, especially in an election year. Greenspan left the recipe for cutting benefits rather vague. He did talk about extending the retirement age again; it's already set to rise to 67 for anyone born after 1960. And he spoke about the need to reduce cost-of-living increases in payments.

So what's the big deal? There's nothing especially shocking about what Greenspan said: It's well known that the trust fund will run out of money. His suggested "benefit cuts" resemble those in the 1983 Social Security reform package. Maybe he was cynical in even suggesting that Congress would consider raising taxes, but cynicism about Congress is an honorable tradition that goes back to the drafting of the Constitution.

Chaining the Consumer Price Index

Put Greenspan's Social Security testimony together with the rest of the Fed's overt policy and public lobbying, though, and you have a formula for significant reductions in cash flow for most Americans who are looking to retire in the next 20 years.

For example, connect Greenspan's comments on lowering cost-of-living increases in Social Security payments to his longstanding preference for an inflation measure called the "chained" consumer price index. Unlike the version of the consumer price index used to measure inflation now, the "chained" index assumes that consumers spend less on things when their price goes up.

The effect is to lower the measured rate of inflation. Inflation as measured by the consumer price index has been 2.1% since 2001. Using the chained index, it was 1.8%.

Over time, that paltry 0.3% adds up. Over 10 years at 2.1%, a monthly Social Security payment of $1,600 rises to about $1,970; at 1.8% it climbs to just $1,912. That's a difference of $58 a month, or almost $700 a year. Over 20 years, the difference between the two inflation rates is $138 a month, or $1,656 a year.