Shameful, Bipartisan Acceptance of Inflation On the Poor

Here are two principles on which most members of both political parties agree.

1) Inflation should not increase people's tax burdens.

2) Inflation should not erode Social Security benefits.

There is, to be sure, some disagreement on exactly how to measure inflation. But few disagree with the general principles. This stance is admirable. At the same time, however, members of both parties seem content to allow inflation to erode access to cash benefits for the poor. And the passive acceptance of that result is, I believe, shameful.

More than four decades ago, Congress enacted automatic adjustments to prevent inflation from eroding the value of Social Security benefits. In truth, that change did little to improve the status of the aged and people with disabilities, as Congress had been raising benefits anyway by enough to roughly offset inflation. But it did a fair bit for honest government. No longer would elected officials take credit, usually in election years, for simply preventing inflation from cutting benefits. And supporters of the program in both parties understood that if Congress ever wanted actually to cut benefits, they would have to stand up and vote to do so. Chalk one up for honesty in government.

Thirty years ago, Congress introduced ‘indexation' into the personal income tax code. Inflation had been raising taxes by stealth. It did so in many ways-for example, by eroding the value of the standard deduction and personal exemptions and by pushing more income into higher brackets. So, Congress enacted rules that would automatically increase the standard deduction and personal exemptions and raise and widen tax brackets enough to offset inflation. Those changes put an end to ‘bracket creep,' the name tax analysts had given to the steady increase in tax burdens resulting from inflation. Henceforth, Congress decided, if members wanted to raise taxes, they would have to ‘man up' and actually vote to raise them. A second gold star for honest government.

But protecting the poor from inflation was another matter. Supplemental Security Income (SSI) pays monthly benefits of $733 to single persons and $1,100 to couples who have little or no income and few assets. The benefit amounts, like those for current Social Security beneficiaries, have been adjusted for inflation. But other provisions, which serve to limit access to the program, have been adjusted little or not at all. As a result, inflation has denied access to SSI benefits to people who would have been poor enough to qualify for them in the past.

Back in 1974, when Congress enacted SSI, it wanted to confine benefits to those who were demonstrably poor. It also wanted to spare administrators the cumbersome and costly job of keeping track of small earnings and scraps of other income. So, it stipulated that benefits should be reduced by one dollar for every two dollars of earnings over $65 a month and dollar-for-dollar if other income exceeded $20 per month. These amounts have never been changed. Meanwhile, the price level has risen nearly four-fold. Had these exclusions been adjusted for inflation, the exclusions would be for $242 a month in earnings and $74 a month of income from other sources.

Part of the rules intended to confine benefits to the very poor was an asset test. SSI benefits back in 1974 were available only if individual recipients had less than $1,500 in assets and couples, less than $2,500. These amounts have been raised, but not much-to $2,000 for single persons and $3,000 for couples. Had they been adjusted fully for inflation, the asset limits would be roughly three times their current levels-$5,580 for single persons and $9,300 for couples.

That is not all. A development in the world of private pensions has made the current asset test even more restrictive. Back in 1972, when Congress created the SSI program, the typical private pension was tied to average earnings and duration of service to the company. Calculating the value of such ‘defined-benefit' plans years or even decades before one is old enough to actually receive them is difficult at best, impossible at worst. So, Congress excluded defined-benefit pensions in computing eligibility. In the succeeding forty-three years, private-sector defined-benefit pension plans have almost vanished. They have been replaced by defined-contribution plans. These plans have a well-defined cash value and are used for determining SSI eligibility. To be sure, workers can withdraw such accumulations when they wish, provided that they pay income tax and pay an extra 10 percent penalty if they are younger than age 59 ½. But this shift in pension arrangements means that a contemporary worker who has defined-contribution pension assets worth no more than his forebears' defined-benefit plan will likely be disqualified from receiving SSI benefits that past workers would have been eligible to claim.

Restoring access to SSI benefits to conditions that the United States was able to afford in 1974 would mean that more people would qualify for benefits. That would raise public spending. But protecting Social Security beneficiaries from inflation also costs money. So, I cannot help wondering- if it is a good thing-and I agree that it is-to protect from inflation people who pay taxes and people who qualify for Social Security, why is it not an equally good thing to protect the poor from economic losses because of inflation.