The president's budget proposal includes the expected Chained-CPI cut. (AP Photo/Manuel Balce Ceneta).
President Obama released his proposed 2014 budget Wednesday morning, and it included a hugely controversial provision: a switch to a Chained-CPI formula for calculating inflation.
Many different government programs—most notably Social Security—calculate benefits based on the rate of inflation, so that benefits don’t lag behind an increased cost of living. The IRS uses similar formulas to ensure that people aren’t pushed into a higher bracket simply because of inflation.
As Dylan Matthews explains here, the government uses several different formulas to do this, and the administration is proposing to unify them all into one formula, called Chained-CPI-U. It purports to be a more accurate measure of inflation by controlling for “substitution effects.”
Current formulas might, for example, rate an increase in the price of beef as inflation, but not consider the fact that people might start buying chicken instead. Chained CPI aims to control for the choices people make in the face of rising prices, and so the inflation it calculates naturally rises more slowly.
Generally this means fewer benefits would be paid out, and people would be pushed into higher tax brackets more quickly—and both result in more money for the government, and thus more deficit reduction. The White House estimates this approach would save $230 billion over ten years.
Seems sensible: but there are a lot of hidden dangers, both on policy and politics, and the White House and its defenders aren’t always forthright about them. Here are the top five myths about Chained-CPI.
1) It’s not a benefit cut, nor a tax increase
A recent briefing paper from the Bowles-Simpson “Moment of Truth” group (citing the economist Robert Greenstein) asserts “this change should not be regarded as a benefit cut or a tax increase. It should be regarded more as a technical change to achieve Congress’s stated goal of keeping pace with inflation in as accurate a way as possible.”
Similarly, the White House shies away from calling this a benefit cut: in Obama’s budget, for example, it’s depicted as a “more accurate” formula that “will reduce deficits and improve Social Security solvency.”
We’ll get to the accuracy argument next, but there’s no debating these simple points: Chained-CPI is both a benefit cut and a tax increase.
The average earner retiring at age 65 would lose $658 each year until they turned 75 under Chained-CPI, and a $1,147 cut by 85. This really adds up—the cumulative cuts to people on Social Security reach $28,000 by the time a retiree is 95, as this chart from Social Security Works shows: