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December 18, 2012

More on Chained CPI, the Benefit Cut for Social Security on the Table in Fiscal Slope Discussions

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The greatest impact would be on the oldest seniors, which happens to correlate with the poorest

I’ve explained the latest Obama offer on the fiscal slope, but I saved the discussion of the chained CPI, which I described the technical details of here.

First of all, this is a benefit cut of about 0.3% a year, as Dean Baker points out. He adds that “This loss would be cumulative through time so that after 10 years the cut would be roughly 3 percent, after 20 years 6 percent, and after 30 years 9 percent.” Actually if we started using chained CPI in 2002, we’d be 3.6% behind today. That’s well over $1,000 a year, and the situation grows worse over time. So the greatest impact would be on the oldest seniors, which happens to correlate with the poorest.

If you think that senior citizens have had it too good for too long, getting that sweet sweet cost of living adjustment to make them unfairly wealthy, then maybe you think chained CPI is a solid idea. If you think that the highest expense for a senior is medical costs, that seniors don’t exactly comparison shop when they need medical care, that they cannot substitute along those lines, and that a cost of living index that features that substitution effect prominently doesn’t correspond to the real costs seniors face, well, you would be right. And that’s why we have a Consumer Price Index for the elderly, which isn’t getting used here:

The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index (CPI-E) which reflects the consumption patterns of people over age 62. This index has shown a rate of inflation that averages 0.2-0.3 percentage points higher than the CPI-W [...]

While the CPI-E is just an experimental index, if the concern is really accuracy, then the logical route to go would be for the BLS to construct a full elderly CPI. While this would involve some expense, we will be indexing more than $10 trillion in Social Security benefits over the next decade. It makes sense to try to get the indexation formula right.

But it makes sense in Washington to “get a deal,” regardless of the consequences of that deal on our seniors. We just had a national conversation about how the primary task of government was to protect the vulnerable. How quickly we forget.

There are a couple variables in the reporting. First of all, Administration sources say that they plan to protect “the most vulnerable populations.” For example, they don’t want to apply chained CPI to wounded veterans and the disabled on Supplemental Security Income. This is an admission that people will get hurt by chained CPI; they’re just trying to manage the fallout. The rest of the ways to protect the most vulnerable haven’t been defined. Usually, you see some sort of “bump-up” in benefits to compensate for the changes to the COLA, particularly for the poorest recipients. However, the National Women’s Law Center points out that the bump-up envisioned in Bowles-Simpson (which included chained CPI) would only restore benefits to current-law levels for two years, before falling behind again. So we don’t know, but if the bump-up took complete care of the benefit cut, nobody would be suggesting doing this as a means to save money.

Second, it’s unclear whether chained CPI would apply to tax brackets. If it did, it would slow the rate at which tax brackets rise every year. If incomes rose faster than the tax brackets, this would kick people into higher ones. Again, this seems like a subtle, technical fix, but as Dylan Matthews points out, they increase over time, and they are also regressively distributed.

The Tax Policy Center calculated the income tax increases that would be caused by a switch to chained CPI. They’re not big — a little more than $100 a year for most families — but they’re oddly regressive [...]

The group getting the biggest tax hike is families making between $30,000 and $40,000 a year. Their increase is almost six times that faced by millionaires. That’s because millionaires are already in the top bracket, so they’re not being pushed into higher marginal rates because of changing bracket thresholds [...]

All told, chained CPI raises average taxes by about 0.19 percent of income. So, taken all together, it’s basically a big (5 percent over 12 years; more, if you take a longer view) across-the-board cut in Social Security benefits paired with a 0.19 percent income surtax.

But Republicans don’t want that small tax increase, so they’re trying to block the use of chained CPI for tax brackets. They want it only to apply to benefits.

Finally, as supporter of a Social Security deal Kevin Drum says, adopting chained CPI for Social Security by itself is a terrible deal. Even if all of the savings from it get plowed back into reducing the long-term income gap, it doesn’t do enough by itself to eliminate that. It reduces the trust fund gap by about 1/3. Which means that fiscal scolds would still be clamoring for a deal to “fix” Social Security, and the fact that the solutions were entirely on the benefit side this time around won’t matter. This is just an invitation to more cuts down the road.

Paul Krugman tries to rationalize and bargain and basically gives a lifeline to cutting these benefits, at a time when senior poverty is on the rise. Ask yourself: are Social Security benefits, which average around $13,000 a year, currently adequate to serve this population, especially when 40% of seniors rely on it for over 90% of their income? Is the solution to 15.1% of seniors in poverty to cut their benefits slowly over time? Should the centerpiece of a deal to reduce the budget contain a benefit cut to a program that has its own dedicated funding stream and no budgetary impact?

UPDATE: First, Krugman has a new post up, saying he is now “marginally negative” on the deal after being “marginally positive.” He ignores the $800 billion in extra budget cuts in the deal.

Also, if anything I undersold the impact of chained CPI, since it would affect federal employee benefits that are tied to COLA, like postal workers.

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