Chained CPI a gimmick we’ll all pay for

Via USA Today, by Duncan Black:

The switch to chained CPI wouldn’t just reduce benefits, including Social Security and Veterans’ benefits, but could also impact future federal tax rates paid by most people.

Various news reports have stated that the Obama administration plans to include cuts to Social Security benefits in its budget proposal. What is less frequently communicated is that such cuts would likely be accompanied by tax increases on the middle class, in violation of one of President Obama’s campaign promises to not increase taxes on those earning under $250,000 per year. These cuts would also impact retirement and disability benefits for veterans.

Many commentators and pundits will described the tax increases and cuts to Social Security and other benefits as a “tweak,” or “technical change,” an “adjustment” or, slightly more honestly, a “gimmick.” This is because the reported proposal will involve changing the calculation of the annual cost of living increase, one measure of inflation, by switching to a new formula known as “chained CPI” (chained Consumer Price Index). Supporters argue that this is simply a more accurate way to calculate changes in the cost of living over time.

It might be, but even if it is a more accurate measurement of cost of living changes for the population overall, there’s no reason to believe that it is a more accurate measurement of those changes for the elderly, the primary recipients of Social Security benefits. Advocates of using chained CPI who claim that their support for it is due to its increased accuracy should also support the construction of a well-researched index specific to the population of retirees. Unsurprisingly, they generally do not, as their interest is in finding a way to cut benefits without anybody noticing. Supposed accuracy is just an excuse, not the real reason.

Perhaps as importantly, the switch to chained CPI wouldn’t just reduce benefits, including Social Security and Veterans’ benefits, but would also impact future federal tax rates paid by most people. Under current law, tax brackets are indexed to the CPI, meaning that a switch to chained CPI could cause those brackets to increase more slowly. People whose incomes are increasing would face higher tax rates more quickly than under current law.

However politicians might wish to hide these facts, a benefit cut is a benefit cut and a tax increase is a tax increase. Personally, I’m in favor of future tax increases when unemployment has fallen farther and contractionary fiscal policies would be less likely to harm the economy, but I’m not in favor of tax increases which fall heavily on the middle class. Any contractionary policy is madness right now, given the weak economy, and increasing the tax burden on the middle class is madness in a time when the 1% are doing so well relative to everybody else.

Cutting promised Social Security benefits is also madness at a time when we’re facing a severe retirement savings crisis. Contrary to popular belief — at least among those who are not current recipients — promised Social Security retirement benefits are already not very generous, with median monthly retiree payouts equal to about$1230. Most people nearing retirement age lack the necessary savings to maintain their pre-retirement lifestyles, as they lack defined benefit pensions and the 401(k) system has generally failed to provide for them adequately.

Right now the focus should be on increasing benefits, both for retirees and for veterans, some of whom have sacrificed more than most of us can comprehend, not cutting them. They all deserve a future of dignity and economic security, not deprivation and fear. And increasing taxes on the middle class is unfair and counter to the promises made during the election campaign.

One can refer to the potential switch to chained CPI as a kind of gimmick, but it’s a gimmick which will result in increased economic hardship for most of us. It is a gimmick which raises tax and reduces promised benefits. It is a gimmick we should all reject.

Duncan Black writes the blog Eschaton under the pseudonym of Atrios and is a fellow at Media Matters for America. He holds a doctorate in economics.

One thought on “Chained CPI a gimmick we’ll all pay for

  1. Pingback: Rep. Rick Larsen and Rep. Jim McDermott cosponsor bill to oppose chained CPI | Social Security Works - Washington

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