Special Report

AARP Is Killing Entitlement Reform

Behind its new ad to pressure the Super Committee to leave Medicare and Social Security untouched.

By 10.14.11

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I'm not a number. I'm not a line item on a budget. And I'm definitely not a pushover. But I am a voter. So, Washington, before you even think about cutting my Medicare and Social Security benefits, here's a number you should remember: 50 million. We are 50 million seniors who earned our benefits, and you will be hearing from us -- today and on Election Day.

So blusters the retirement-aged gentleman in the AARP's new TV ad.

AARP is not just taking a partisan gamble with this brazen threat against reformers, most of whom are Republicans; they're threatening our whole nation's financial future. The organization makes an enormous amount of money from selling insurance policies that are desirable to its members precisely because the current system is as it is. Thus, the AARP has a multi-billion dollar financial interest that is separate from, and arguably contrary to, the interests of its members.

Indeed, earlier this year the House Ways and Means Health Subcommittee held a hearing on whether the overlap between AARP's insurance business and its lobbying and advocacy efforts is appropriate: "there is good reason to question whether AARP is primarily looking out for seniors or just its own bottom line." A report by Republican congressmen Wally Herger (CA) and Dave Reichert (WA) entitled "Behind the Veil: The AARP America Doesn't Know" is a damning indictment of the organization's inherent conflicts of interest, including:

• "AARP is in fact a large, complex and sophisticated organization with over $2.2 billion in total assets and had revenues in excess of $1.4 billion in 2009 alone."

• "AARP is one of the nation's largest insurance companies and by far the largest provider of Medicare plans to seniors."

• "AARP is also one of the most powerful and active lobbying groups (in terms of dollars spent) in the country."

• "The missions of [AARP's subsidiaries] appear in direct conflict with one another and, as such, it is very difficult to determine which interests are being represented -- those of the 'non-profit' or the 'for-profit' arm of AARP."

• "The Democrats' health care law, which AARP strongly endorsed, could result in a windfall for AARP that exceeds over $1 billion during the next 10 years."

It's not the first time the AARP has run such an ad. A similar one, with the same actor, came out in July also emphasizing the group's 50 million members as an unveiled threat against members of Congress.

AARP spokesperson Tiffany Lundquist spent some time discussing the issue with me, including saying that the ad "was designed to bring attention to the discussions now taking place in Washington on proposals which may include cuts to Social Security and Medicare benefits."

When asked whether the release of this ad was timed to influence the discussions of the "Super Committee" that is attempting to negotiate deficit- and debt-reduction policies to bring before Congress, Ms. Lundquist responded "definitely."

I suggested to Ms. Lundquist that I was unaware of any plan that would cut benefits for current retirees or even near-retirees, to which she replied that the AARP has members as young as fifty and that the organization "works for the interests of our younger members as well." Further, she named a particular idea that the AARP is against: a change in the formula to calculate Social Security's annual cost of living adjustment ("COLA").

In particular, there has been discussion for many years of changing which version of the Consumer Price Index is used to calculate annual benefit increases. It has been suggested that changing to a "chained CPI" which more accurately reflects how people actually spend money, in part by assuming that people will substitute out of items which are increasing in price if they can, will slow the growth of entitlements' cost.

Going back many years, some of the most credible economists in America have argued that the current CPI calculations overstate inflation and thus increase Social Security payments more than they should, putting tremendous pressure on the federal budget -- not least because each over-generous increase is compounded by the next. In 1997, Federal Reserve Chairman Alan Greenspan stated that "We know with near certainty that the current CPI is off. There's a very high probability that the bias ranges from half a percentage point to 1 1/2 percentage points per year." And Alice Rivlin, a Democrat and then Vice Chairwoman of the Fed, said that "The way we measure inflation, the way we measure productivity are flawed," repeating in a 2004 book that "Research has shown that the consumer price index overstates inflation somewhat."

THE AARP's POSITION mirrors those of redistributionists everywhere who argue that slowing the growth of a government program is the same as cutting it. If your employer gave you a three percent pay raise this year and then a two percent pay raise next year, the AARP and almost every Democrat on Capitol Hill would argue that you got a pay cut in that second year because you were expecting a bigger raise. At least they should argue that to be consistent with their sky-is-falling claims about controlling the growth of entitlement spending.

Ms. Lundquist also repeated the ad's rhetoric that AARP members have "earned" their benefits. But what exactly have they earned? Is any current or future recipient of entitlement payments due a particular COLA formula? At least two courts have recently said "no." In June, judges in Denver and St. Paul, Minnesota, ruled that beneficiaries of public pensions do not have a right to a particular cost of living calculation.

In the Minnesota case, the plaintiffs (beneficiaries of various Minnesota public retirement systems) claimed that the state's move to adjust the formula for post-retirement benefit calculations were an unconstitutional taking of property. In his ruling, Judge Gregg Johnson stated that a claimed "expectation that future adjustments would be made pursuant to a particular formula… has neither a contractual basis, nor a reasonable basis enforceable by estoppel principles."

And in a similar Colorado case, plaintiffs sued after the state capped COLA increases (as well as increasing retirement age and other qualifying requirements) for PERA, the state's public employee pension plan, arguing that the changes violated "Contract, Takings, and Substantive Due Process Clauses of the United States Constitution." In his opinion, District Court Judge Robert Hyatt concluded that "there is no contract right to a specific COLA formula frozen at retirement for life." Furthermore, both judges agreed, as Judge Hyatt put it, that there is a "legitimate governmental interest of… preserving the solvency of PERA."

Responding for this article, Senator Mike Lee (R-UT) said, "There is no plan I have seen or supported that would cut benefits for current retirees. But, the reality is that without reforming our entitlement programs for future beneficiaries our economy will collapse. We have an obligation to prevent that from happening." Senator Lee, along with Senators Rand Paul (R-KY) and Lindsey Graham (R-SC) have introduced legislation to begin to deal with the cost of Social Security benefits -- but they explicitly exclude those of or fewer than five years from retirement age from any impact of the changes, and they phase in those changes for those more than five years from Social Security eligibility. The trio explained their rationale in a press conference in April.

Indeed we do have a responsibility to keep from bankrupting the nation. But the AARP sees no such responsibility as part of its mission, at least not if it means its current or future members giving up even one cent of entitlement increases based on the way those increases are calculated today.

Ms. Lundquist says that the AARP "wants to see [the entitlement-related budget issues] addressed now or later." But when asked if the AARP would support plugging our gaping budget hole in part by reductions in benefit growth for future retirees, her answer was a resounding no: "Don't cut benefits."

Of course, this came mere moments after she professed the organization's desire to see Social Security "strengthened." When I suggested that a refusal to accept any benefit cuts (including slower growth in benefits) ever means that the group can only be supporting tax increases, the AARP's spokeswoman responded coyly, "We haven't said that."

And she was equally adamant against Social Security reform that would include personal accounts, making the usual anti-liberty econo-nonsense claim that "recent stock market volatility shows that's the wrong way to go."

A cursory look at major mutual fund companies' offerings shows a range of funds investing in a range from government bonds to corporate bonds to blends of bonds and stocks that despite the wild volatility in the last few months and years have long-term returns at least double that which Social Security will provide. At least as importantly, many of them have a "beta" (correlation to a stock market average, a common measure of risk) much less than one, meaning an investor in such funds doesn't have to lie awake at night worrying about what the market will do tomorrow.

Furthermore, the large fund companies have products specifically tailored to a person's expected retirement age, moving the asset allocation gradually out of stocks and into bonds as a person nears retirement. Almost any of these funds would be better than Social Security if your goal is actually to retire with a nest egg.

Helping create solid nest eggs and self-reliant retirements for its members is apparently not on the AARP's "to do" list.

So what is the AARP afraid of? They're afraid, as all liberal interest groups are, of several things:

• Less money flowing through the sticky hands of government, reducing the ability of government to create programs which benefit the AARP's bottom line.

• More personal responsibility being taken by individuals for their own retirements, reducing the need for retirees to be dependent on AARP for advice, financial services, or lobbying.

• More Americans having incentive to be economically well-educated and to care about the impact of government policy, including taxation and spending, on the value of their retirement savings, and most of all they're afraid of.

• Better financial results for their members, reducing the need for the members to buy AARP-branded insurance policies.

MAY 1, 2011 REPRESENTED the 30th anniversary of reforms of Chile's Social Security-like system that turned it from a defined benefit plan with a defined contribution system. A National Center for Policy Analysis study from last year lays out the tremendous benefits of the reforms on labor participation, by its removing the incentive from people to retire in their early 60s when they would still have many productive years ahead of them, should they choose to work. People contribute more and begin withdrawing later, an obvious recipe for retirement plan success.

The Chilean system isn't perfect, but has been gradually made better over time. As a report by our own Social Security Agency notes, "The International Monetary Fund supports these changes because they strive to retain the basic features of the individual account system and, at the same time, address its major shortcomings…. Since the 1990s, 10 other Latin American countries have adopted some form of an individual account system either to replace or supplement their PAYG systems."

It's not just Social Security, either, which in economic terms is small in comparison with the problems we face with Medicare. If the nation were to try to fix Medicare's fiscal woes without slowing the growth in costs… well, it simply cannot be done.

The leading Republican voice for Medicare reform -- one of the few men with the courage to take on the issue -- is House Budget Committee Chairman Paul Ryan (R-WI), who contributed a few thoughts for this article: 

We can no longer let politicians in Washington deny the danger to Medicare -- the danger is all too real, and the health of our nation's seniors is far too important. We have to save Medicare to avoid disruptions in benefits for current seniors and to preserve the program for future generations. House Republicans showed in the Path to Prosperity that we can fix this program for future generations while making no changes for those who are in and near retirement.

The facts are this: the President's healthcare law takes half a trillion dollars from Medicare and puts it towards a new health care entitlement; then charges the Independent Payment Advisory Board (IPAB) with putting price controls on Medicare, limiting care for current seniors. House Republicans passed a budget this spring which stands in stark contrast to this approach. We stop the raid on Medicare, we repeal the President's board, and we preserve the Medicare benefit keeping it intact for everyone above the age of 55 and reforming the program for future generations.

But the AARP will have none of Paul Ryan's reforms, nor anybody else's, if it means reducing the growth in health care expenditures (even if that growth would be accompanied by productivity gains which would give better health care overall for fewer dollars).

After all, with the AARP, it's not really about better results for the nation or even for its members, most of whom I assume care deeply about the future of our nation. It's about selling insurance. And that means working to perpetuate a system in which America's future senior citizens will not have either the wherewithal or the economic education to be responsible for their own autumn years' finances and health.

The AARP poses the situation as if the status quo in terms of entitlement spending is somehow an option. A Republican congressional aide put it to me this way: "From my view, it's fine for AARP to say, 'We'll be watching and remembering your votes on entitlements because we're senior/retirees and we have been promised these benefits.' It's quite another for them to be completely silent about the fact that their members will be facing drastic across the board cuts to Medicare (in 2021) and Social Security (in 2037) unless reforms occur. The Democrats plan is to bleed these entitlements dry until they're insolvent while Republicans are offering what AARP constituencies should want: NO CHANGES for anyone over 55 with respect to Medicare, while acknowledging that reforms must be made for future generations."

The Republican House budget -- the only budget that has passed either chamber of Congress in a couple of years -- strengthened the solvency of our entitlements without making changes for those in or near retirement. Unfortunately, AARP's entitlement reform plan is the same as President Obama's. What is that plan, you ask? Again, the House aide: "The answer can be found both in the President's health care law and in his budget (no reforms of Social Security and Medicare, literally it's status quo). Pretending a problem doesn't exist, doesn't mean you've solved it -- and in the case of entitlements, with 10,000 baby boomers retiring each day with fewer workers to replace them, you're simply exacerbating the problem and leaving us less preferable options."

The AARP's dual loyalties -- to its members and to its own bottom line -- make it a difficult organization to trust. The Herger-Reichert report notes that "Since 2002, income generated from AARP membership dues has increased 32%, or $60 million. However, during this same period, income derived from AARP's business relationships, primarily with insurance companies, nearly tripled, increasing by $417 million. Royalty payments from for-profit companies comprised nearly 46% of AARP's revenue in 2009, while membership dues totaled just 17% of total revenues." With insurance revenues roughly triple the level of dues revenues, it is hard to see the members' interests -- not to mention the nation's interests -- winning out should they come in conflict with the AARP's bottom line.

Yet that is precisely the conflict we face today with yawning budget deficits threatening to swallow our financial future but the AARP screaming "we want every penny, even if it bankrupts our members' grandchildren." The AARP's ad explicitly threatens politicians who do anything other than raise taxes to address entitlement programs' financial woes.

It's time to fight back. It's time for the rest of the nation to say to the AARP that "We're not pushovers, either. We're three hundred million people whose futures you are risking so you can collect insurance premiums. And we're going to stand up for every politician who calls you out for what you are."

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About the Author
Ross Kaminsky is a self-employed trader and investor and is a senior fellow of the Heartland Institute. He is the host of The Ross Kaminsky Show on Denver's NewsRadio 850 KOA on Saturday mornings from 6 AM to 9 AM. You can reach Ross by e-mail at rossputin(at)rossputin(dot)com.