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Top 5 Myths About Chained-CPI, Debunked | The Nation

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George Zornick

George Zornick

Action and dysfunction in the Beltway swamp. E-mail tips to george@thenation.com

Top 5 Myths About Chained-CPI, Debunked


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:

Bowles-Simpson has what’s called a “birthday bump” in their Chained-CPI formula: an increase in benefits in the 20th year to help offset the cuts, something the White House endorses. But this still fails to make up for the benefit cuts. Here’s Social Security Works again:

Chained CPI also has the effect of raising taxes by pushing people to higher marginal rates. It’s not a huge effect, but one that’s quite regressive: middle-income earners are hit the hardest. Here’s a chart from Dylan Matthews:

Matthews notes that “[t]he 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.”

2) It’s a more accurate measure of inflation

Proponents of Chained-CPI rebut the benefit cuts by making an accuracy argument—suggesting that beneficiaries are getting an unfair windfall from current inflation formulas that are over-compensating for inflation.

There’s no doubt that, economy-wide, Chained-CPI is a more accurate measure of growth in living standards. But that just doesn’t hold when applied to seniors on Social Security.

The argument for Chained-CPI is that average consumers replace items in their “basket” of goods when something gets too expensive. But seniors have quite a different basket of goods—namely, a lot of out-of-pocket spending on health care, which outpaces inflation and is also extremely hard to replace. (In fact, even the current formula for calculating Social Security benefits probably understates the real cost of living for seniors.)

The Economic Policy Institute has the numbers here:

In short, the 65-and-older households spend roughly three times what the rest of the population does on health care, measured as a share of total spending. Further, between 1989 and 2007,prices for health care have risen nearly twice as fast as overall inflation—growing 100% over that timespan, compared with 53% growth in overall prices of consumption goods.

Seniors spend a lot of money on health care, and just aren’t able to buy different, cheaper drugs when the price of their medication goes up—so the Chained CPI argument just doesn’t work here. And the price of those drugs is going up much faster than the prices of most consumer goods, and the same is true of Medicare premiums.

EPI concludes that “In short, rising health care costs and falling incomes already provide large pressures on Social Security beneficiaries’ incomes as they age. Reducing the [cost-of-living] adjustment would just apply one more economic pressure that grows over their retirement.” They advocate switching not to Chained-CPI-U, but CPI-E, which measures cost-of-living increases among the senior population.

Note, too, that these seniors are the ones bearing most of the brunt from switching to Chained-CPI government-wide: about $115 billion of the $230 billion in estimated savings comes from Social Security.

3) We can enact Chained-CPI still protect veterans and the most vulnerable

The White House says that it will insist on protections for the most vulnerable and for veterans under any Chained-CPI plan. (This is, by the way, already a tacit admission that Chained-CPI isn’t truly more accurate—if it was, and all it was doing was removing an unnecessary windfall to beneficiaries, why does anyone need protection?)

The administration proposes the aforementioned “birthday bump,” which as we noted still doesn’t make up for the benefit cut. They also advocate protecting lowest-income seniors and people with disabilities by exempting Supplemental Security Income from Chained-CPI.

But here’s the problem: SSI is already too small, and doesn’t reach enough poverty-stricken seniors. In fact, there are 9.4 million poor or near-poor people who receive Social Security, but not SSI—so they still get hit. In addition, there are 2.8 million “dual-eligibles”—people who are on SSI but also receive some Social Security benefits. They’d be hit as well.

While the administration laudably wants to protect various veteran’s benefits programs from Chained-CPI, 9.3 million veterans are on Social Security, which is one in five Social Security beneficiaries. So they still won’t be totally insulated from the Chained-CPI cuts either.

4) It will help achieve a deal with the GOP

Obama argues that Chained-CPI isn’t what he wants, but what he feels he must to do get a deal with the GOP. “I don’t believe that all these ideas are optimal, but I’m willing to accept them as part of a compromise,” Obama said in the Rose Garden Wednesday.

But he proposed Chained-CPI during the debt-ceiling talks in 2011, and the GOP did not accept his grand bargain. He proposed them as part of a deal to avert the sequester earlier this year, and the GOP did not accept the deal. Now he’s proposing them in his budget. Is the result any different?

Well, no. Paul Ryan rejected the idea that Chained-CPI would make a deal with Obama viable. “I don’t see this as fundamental entitlement reform as much as clarifying a statistic which does happen to save money,” he said Wednesday.

No Republicans in the House or Senate have yet said they were interested in Obama’s budget, and the prospect of them doing so is non-existent.

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In fact, Obama may be unintentionally strengthening the Republican’s hand in this debate by validating their theory of deficit reduction.

The Obama approach during the 2012 campaign was that the deficit should be addressed by a sensible mix of spending cuts and new revenue, and that the safety net should be protected. These Democratic Party priorities were reflected in the Senate Democrats’ budget, which did not contain Chained-CPI. The Republican approach, meanwhile, is that deficit reduction should consist of cuts and cuts only, and “serious entitlement reform.”

Instead of battling the GOP on the idea that cutting the safety net is a bad way to reduce deficits—particularly Social Security, which doesn’t even contribute to it—Obama has endorsed the GOP approach by agreeing to Chained CPI. And don’t think they won’t point that out—and use it to advance the ball on cutting entitlements.

Here’s Mitch McConnell Wednesday, after the Obama budget was released:

“The President seems prepared to finally concede this time that at least something needs to be done to save entitlements from their inevitable slide toward bankruptcy. I’m glad to see him begin to come to grips with the math here. It’s well past time for reform, and it’s something the President ought to want to do because he presumably cares about saving entitlement programs – not just because he wants yet another excuse to raise taxes.”

Here’s House Speaker John Boehner:

“[Obama] does deserve some credit for some incremental entitlement reforms that he has outlined in his budget. But I would hope that he would not hold hostage these modest reforms for his demand for bigger tax hikes. Listen, why don’t we do what we can agree to do? Why don’t we find the common ground that we do have and move on that?”

Think of this phase of the sequestration and budget fight as an election—where each side tries to convince the public that their approach is optimal. Winning means the other side is under the gun of public opinion and comes to the table ready to deal.

Endorsing the other side’s ideas during this phase is not terrific strategy. Might Obama have to accept some Republican ideas in the final agreement? Sure, but the GOP has shown absolutely zero desire to reach an agreement, so prematurely endorsing their approach is explicitly counter-productive.

Defenders of the White House strategy theorize this approach is helpful for public opinion because it highlights that the GOP is unwilling to compromise.

But what’s the added value of highlighting what virtually everybody in the country who follows this debate understands? As Matthew Yglesias writes: “To any reasonable person, the fact that the GOP ran in 2008 and 2010 and 2012 on a platform of all-cuts deficit reduction makes that clear. If you need further evidence you can look at the GOP's negotiating strategy during the 2011 debt ceiling battle, during the fiscal cliff in the 2012 lame duck session, and all throughout the sequestration controversy. You can ask John Boehner. Or Eric Cantor. Or Mitch McConnell. There's a lot that's murky in American politics, but it's incredibly clear that the reason we don't have a grand bargain on the budget is that Republicans don't want one.”

5) It won’t hurt Democrats in 2014

A key argument against Chained-CPI that progressives have made for months is that Republicans would use it to slam Democrats in the 2014 midterms, just as they did with the Medicare cuts in Obamacare.

And just on cue, the head of the House GOP re-election committee appeared on CNN yesterday and said that Obama’s budget “lays out a shocking attack on seniors.” He continued:

“I’ll tell you when you’re going after seniors the way he’s already done on Obamacare, taken $700 billion out of Medicare to put into Obamacare and now coming back at seniors again, I think you’re crossing that line very quickly here in terms of denying access to seniors for health care in districts like mine certainly and around the country.”

The White House pushback is twofold. First, point out this isn’t what Obama really wants. “This is a Republican proposal,” White House press secretary Jay Carney said on Thursday. Actually, it’s in Obama’s budget, so good luck with that defense.

Meanwhile, senior White House officials ultimately think this line of attack won’t be effective in 2014. “The White House…feels it can win any political fight on entitlements…after the successful test case of the 2012 campaign, when Republicans tried to make an issue of the $700 billion in Medicare savings contained in Obamacare, but didn’t land any body blows,” Alex Seitz-Wald reported after a briefing from administration officials.

That’s wrong for a couple reasons. For one, the $700 billion in Medicare cuts were largely sensible and did not depress the Democratic base nor divide the party, as the push to cut Social Security will. (Every major progressive group has blasted Obama’s Chained-CPI approach, gathered petitions, and even threatened to primary Democrats who vote for it.)

Two, one can’t take an extremely reductive approach to the 2012 election: just because Obama won, every attack Romney and Ryan wasn't per se ineffective. The ferocity and frequency with which they attacked the $700 billion in cuts suggests they had data showing it was costing Obama votes. Just because it didn’t cost him enough votes doesn’t mean it’s a bad strategy.

Moreover, polls show that Chained CPI is horribly unpopular:

The AARP reveals that 70 percent of voters age 50-plus oppose the use of the chained CPI to cut benefits, and two-thirds of them – including 60 percent of Republicans — say they would be “considerably less likely” to support a congressional candidate if he or she backed a new way of calculating consumer prices. And 84 percent of voters over 50 say Social Security has no place in budget-deficit discussions, since it is self-financed.

You can’t just brush that off by saying “Obama won in 2012.”

George Zornick last wrote about another new proposal in Washington that has left much of the country disappointed: the gun control package.

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