Yesterday, the president released his 2014 budgetand, among some solid line items like additional infrastructure spending, universal preschool and reductions in tax breaks for Big Oil, he also proposed the truly stupid idea of linking Social Security cost-of-living-adjustments (COLAs) to something called "chained CPI" (chained consumer price index).
Briefly put, Social Security benefits are routinely hiked by a few percentage points each year based on inflation. Lately, those bumps have been scarce and more than a little weak, but adjustments based on chained CPI would be even weaker because the government would presume that as retail prices increase with inflation seniors will substitute lower-cost items. In other words, the government currently calculates benefits based on inflation, but with chained CPI, the government would calculate benefits based on an assumed consumerreaction to inflation (buying cheaper stuff). Consequently, Social Security benefits would be reduced to follow this assumption.
Yeah, it sucks. And the president, while attempting to play the role of the grown-up in the room and apparently taking responsible steps toward deficit reduction and Social Security salvation, is only managing to wrap his entire presidency around the big political third rail. It's not as huge as George W. Bush's second-term embrace of Social Security tinkering, but it's a bad move.
Not only is the idea a punitive one for seniors, but the president is also fueling a series of inside-D.C. myths. They are:
1) Social Security is broke! IEEE! This might, in fact, be biggest D.C. myth of all D.C. myths. It originated with Republican concern trolls who pretend to care about Social Security but, in reality, are trying to kill it. The strategy is to weaken it to the point of being unpopular and unsalvageable -- ripe for a private takeover or total shutdown. And so we get this on-going panic-button freakout that echoes through the complacent false equivalence press corp, and is ultimately fueled by Democrats like the president. But according to the Social Security trustees, the program will be capable of paying full benefits based on the current COLA formula for the next 20 years. Actually, the outlook is even better than that: the trustees also reported that Social Security will run asurplus until 2033. Can you imagine if any program in the federal government was projected to run a surplus for even half of that time? Budget hawks would crap their cages demanding immediate action to give back the taxpayers' money by slashing the program to the line. Furthermore, once 2033 rolls around, Social Security will be capable of paying 75 to 80 percent of total benefits in 2033 money, which, accounting for inflation, is more than Social Security recipients receive today.
2) We have to tinker with Social Security because of the deficit. Whenever deficit hawks suffer from one of these routine fits of apoplexy, they always manage to loop Social Security, Medicare and Medicaid cuts into the mix, along with cuts to minor spending areas like foreign aid. Put another way, a gaggle of super-wealthy politicians and pundits who will never really need Social Security are always way, way, waaaay too eager to dump these programs onto the chopping block. In a budget crisis that's ginned up by multi-millionaires, we should demand that they get in line first -- cut programs and spending on areas that effect the wealthiest Americans, including corporations, before anyone else is forced to pitch in.
3) We have to cut the deficit or else! Total nonsense. The deficit has dropped by nearly 48 percent(as a percentage of GDP). From the high water mark of $1.4 trillion in 2009, the deficit has steadily decreased to a projected $845 billion by the end of this year. The CBO projects that by the end of 2016, the deficit will have dropped to $433 billion, for a total of nearly a trillion dollars in deficit reduction in six years. But the economic recovery is still slow. Now isn't the time to be making further drastic cuts in government spending, and by continuing to talk about deficit reduction, the president only amplifies the false perception that the deficit is growing -- along with all of the usual idiotic conflation of the deficit and the national debt.
4) Raising the payroll tax rate or lifting the income cap is out of the question! The president is already widely accused of being a big tax-hiker by Republican opponents, so another two or three percent hike in the payroll tax (the FICA tax found on your paycheck stub) probably wouldn't make much of a difference on that front, nor would proposing that the income cap on the payroll tax rise from $113,000 to, say, $200,000 or higher. But I'm not sure I've ever heard anyone from the White House even hint at floating such a plan. Personally, I would entirely eliminate the income cap, which would allow Social Security to pay full benefits until 2087, but I'm clearly a tax-loving Euro-socialist. You know, like Ronald Reagan:
In 1983, for example, [Reagan] signed off on Social Security reform legislation that, among other things, accelerated an increase in the payroll tax rate, required that higher-income beneficiaries pay income tax on part of their benefits, and required the self-employed to pay the full payroll tax rate, rather than just the portion normally paid by employees.
Obviously in today's political climate, Reagan would've failed.
But here's the good news. Naturally we ought to keep a close eye on anyone who meddles with the program, but I seriously doubt the chained CPI proposal will pass. Any real plan to reinforce the stability of Social Security will happen gradually, imperceptibly and in private without a lot of hoopla. That's the reality of Social Security sausage-making. It's the way it's always been because the alternative is to commit political suicide -- the most recent example was Bush's disastrous privatization scheme in 2005.
So why not go for a plan like the one I outlined in item #4, or -- shocker -- the Reagan plan instead of floating this weird, jargony concept that's already been tagged as a benefit cut, the worst of all solutions? It's baffling, and it's impossible to defend the president on this one. Any upside, real or unreal, of being viewed as "the grownup in the room" will be far outweighed by supporting a cut in Social Security benefits. And now when Future Republican President X wants to slash benefits, he or she only needs to point to the prior endorsement of President Obama. Sadly, and irrespective of any political chess gambit he's setting up, he's contributing to this nefarious Social Security "insolvency" panic-mongering: a total myth and perhaps the biggest lie being foisted upon the American people today.
Cross-posted at The Daily Banter.
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Issue Brief December 2012
* Alan Barber is the Domestic Communications Director at the Center for Economic and Policy Research in
Washington, D.C. Nicole Woo is Director of Domestic Policy at CEPR.
The Chained CPI: A Painful Cut in Social Security Benefits and a Stealth Tax Hike
In the debate over federal budget deficits, several politicians have proposed to change the formulas that determine benefit levels for Social Security and other government programs as well as income tax brackets. Switching to a relatively new formula, the Chained CPI, would help the federal government save money by slowing increases in benefits and raising additional tax revenue.
Proponents of this proposal argue that the Chained CPI is a more accurate formula and any impact on beneficiaries of the government programs affected would be mitigated by increased tax revenue from the wealthy. However, research and data effectively refute those arguments by showing that:
1) Switching to the Chained CPI would result in cuts to already modest Social Security benefits.
2) It is likely that the Chained CPI is not an accurate measure of the inflation rate seen by seniors.
3) The Chained CPI would lead to income tax increases for working Americans.
Measuring Inflation
The Bureau of Labor Statistics (BLS) calculates the consumer price indexes (CPIs) to gauge inflation by measuring changes in the prices of goods and services that Americans purchase each month. In addition to being the basis for annual adjustments in benefits for government programs, changes in income tax brackets and deductions are also pegged to CPIs. Different indexes are used for different purposes. The CPI-U is used for income tax bracket calculation, while the CPI-W has been used to determine the yearly change in benefits for Social Security to keep pace with inflation since 1975.1
Some policy makers now want to change to the Chained CPI, which shows a lower rate of inflation than the currently-used CPIs. This index measures the price of a basket of goods that changes in response to the relative price shifts of different goods as opposed to the CPIs, which remain fixed over time. An example of this would be a rise in the price of chicken leading people to buy less chicken and more cheese. The Chained CPI would then place a higher weight on the cheese component of its index and a lower weight on the chicken component. In essence, it substitutes in items with less rapid increases in price for items that have more rapid rises in price thereby causing it show a lower overall rate of inflation.
The Chained CPI Would Result in Benefit Cuts for Retirees and Other Vulnerable
Americans
Social Security benefits are already quite modest. In 2012, the average annual benefit for
beneficiaries aged 65 and older was less than $15,000.2 Any additional reduction of benefits would
have serious repercussions for retirees, 2-out-of-5 of whom rely on Social Security for 90 percent of
their retirement income.
The Chained CPI is relatively new and has only been calculated by the BLS since 2002. It has shown
a rate of inflation 0.3 percent lower than the current index used to calculate Social Security’s annual
cost-of-living adjustment. Over time, changing to the Chained CPI would result in significant cuts to
Social Security benefits: a cut of roughly 3 percent after 10 years, about 6 percent after 20 years, and
close to 9 percent after 30 years. In addition, lower-income retirees would lose much larger
proportions of their income than wealthy ones.3
As shown in Figure 1, if the switch to the Chained CPI had been made in 2001, the reduction in
benefits would have effectively wiped out the entire 2012 Social Security cost-of-living adjustment.4
Switching to the Chained CPI immediately would have a more significant impact on the retirement
income of seniors than the ending the Bush-era tax cuts would have on the after-tax income of the
wealthiest 2 percent of households. For the average worker retiring at age 65, this would mean a cut
of about $650 each year by age 75 and a cut of roughly $1,130 each year at age 85.5 These reductions
in benefits would be a substantial hardship for millions of retired and disabled Americans.
Switching to the Chained CPI would also directly affect many other vulnerable Americans. Many federal assistance programs rely on the CPI to determine eligibility for benefits. Just as the elderly would see their benefits cut by shifting to the Chained CPI, so would veterans, low-income children, the disabled, and others who are more likely to rely on government programs.
Accurately Calculating Cost-of-Living Adjustments for the Elderly
It is important to note that while some claim the Chained CPI more accurately calculates inflation, this is likely not the case for seniors, who would be directly affected by using the Chained CPI to calculate Social Security’s cost-of-living adjustments. The Bureau of Labor Statistics has found that seniors spend proportionally more of their income on medical care and housing, which in addition to rising more rapidly than most other costs, are also much harder to substitute with other products. This research suggests that a CPI based on living costs of the elderly would actually show a higher, not lower, rate of inflation. The BLS has constructed an experimental elderly index (CPI-E) that takes these factors into account, and it shows a rate of inflation that averages 0.3 percentage points higher than the CPI currently in use.6
In addition, there are fewer opportunities for substitution in these areas of consumption. Also, because the elderly are a less mobile population, they may find it more difficult to change their consumption patterns. If accuracy is the main concern to be addressed by altering the Social Security cost-of-living adjustment, then the BLS could construct a full elderly index that more accurately tracks the consumption patterns of the elderly. There is no basis for assuming that a Chained CPI more accurately measures the rate of inflation experienced by the elderly than the current measure, however there is no doubt that it will lead to a reduction in benefits.
Some proponents of the Chained CPI argue that workers would respond to a reduction in Social Security benefits either by working later into life or saving more for retirement. In fact, in the 1990s there were a series of methodological changes to the CPI that reduced the measured rate of annual inflation by 0.5-0.7 percentage points. If the workers responded as argued, we would expect that non-Social Security income would be a larger portion of total income for beneficiaries in their mid-70s now (and therefore would have mostly been receiving the lower cost-of-living adjustment for a decade) than before the CPI was changed. However, the data shows the opposite: the share of Social Security in retirement income increased rather than decreased in the vast majority of cases.7 This indicates that most workers did not save more to make up for lower Social Security benefits in order to counteract the CPI reduction. This is further proof that switching to the Chained CPI would lead to lower retirement incomes for elderly Americans.
This is of particular note as the rise in the retirement age has already resulted in a decrease in benefits relative to lifetime earnings. The full-benefits retirement age increased from 65 to 66 between 2003 and 2008, and it is scheduled to rise further to 67 from 2017 to 2022. These retirement age increases are cuts in benefits, since beneficiaries have to work more years before receiving them. Early retirees who begin collecting benefits at 62 between the years 2005-2016 are already seeing a decrease in benefits relative to lifetime earnings of 5 percentage points. For those retiring at 62 after 2022, when the retirement age reaches 67, the decrease in benefits will be 10 percentage points. Figure 2, below, illustrates the benefit cuts for these retirees as a result of the prior CPI changes and the scheduled increases in the eligibility age for full benefits.8 Adopting the Chained CPI would mean additional benefit cuts, further eroding the retirement security of Social Security beneficiaries.
A Stealth Tax Increase on the Middle Class
The Chained CPI would also effectively raise taxes on virtually all working Americans, especially middle and lower income families. By applying it to all government programs, including the annual adjustment in income tax brackets, the Chained CPI would cause those thresholds to rise more slowly than they do now. That would lead to incomes jumping up to higher tax brackets faster, or in other words, income tax increases.
According to Congress’ Joint Committee on Taxation, if individual income taxes were indexed to the Chained CPI starting in January 2013, by 2021, 69 percent of the gains in revenue would come from taxpayers with incomes below $100,000, while those in the highest income brackets would barely be affected. For example, workers with incomes between $10,000 and $20,000 would experience an increased tax burden of 14.5 percent, while those with incomes over $1,000,000 would just see an increase of 0.1 percent. 9 This contradicts the idea that the negative effects from benefit cuts due to a switch to the Chained CPI would be offset by increased revenue from the wealthy.
1 Social Security is indexed to the CPI-W (an index that tracks the consumption patterns of wage and clerical workers), while tax brackets and most other programs are indexed to the CPI-U (an index that tracks the consumption patterns of all urban households).
2 Social Security Administration. 2012. “Monthly Statistical Snapshot, October 2012. ”http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot
3 Baker, Dean and David Rosnick. 2010 “The Impact of Social Security Cuts on Retiree Income.” Washington, DC: Center for Economic and Policy Research. http://www.cepr.net/index.php/publications/reports/the-impact-of-social-security-cuts-on-retiree-income
4 CEPR Graphic Economics. 2011. “Eleven Years Under Chained CPI Would Effectively Wipe Out the 2012 COLA.” October 19. http://www.cepr.net/index.php/graphic-economics/graphic-economics/eleven-years-under-chained-cpi-would-effectively-wipe-out-the-2012-cola
5 Calculations based on 2012 Trustees report (http://www.ssa.gov/oact/tr/2012/index.html) if change is made from CPI-U to Chained CPI in January of 2013.
6 Stewart, Kenneth J. and Joseph Pavalone. 1996. “Attachment F: Experimental CPI for Americans 62 Years of Age and Older.” Washington, DC: Bureau of Labor Statistics. http://www.bls.gov/news.release/cpi.br12396.a06.htm
7 Baker, Dean and David Rosnick. 2011. “The Impact of Cutting Social Security Cost of Living Adjustments on the Living Standards of the Elderly.” Washington, DC: Center for Economic and Policy Research. http://www.cepr.net/index.php/publications/reports/impact-of-cutting-ss-cola-on-living-standards-of-elderly
8 Ibid.
9 Barthold, Thomas A. 2011. “Memorandum: Revenue Estimate and Distributional Analysis.” Congress of the United States, Joint Committee on Taxation. June 29. http://democrats.waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/media/pdf/112/6-29ResponseChainedCPI.pdf
http://www.scribd.com/doc/116575690/The-Chained-CPI-A-Painful-Cut-in-Social-Security-Benefits-and-a-Stealth-Tax-Hike
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