From WPDE News Channel 15 in Conway, South Carolina
The Chained CPI, which we’ve written about any number of times, is getting support from Congressional Republicans, President Obama, and even some Democrats. The chained CPI itself is a bit convoluted, but here’s the quick and dirty: it’s a backdoor benefit cut that will reduce Social Security benefits – and it gets worse as you get older.
The graph below shows just how big of a benefit cut the chained CPI would represent for the average retiree.
Given the implications for retirees, many Democrats (and a few Republicans) have voiced strong opposition to the chained CPI, but now David Cicilline (D-RI), has proposed a bill that pushes back against the chained CPI.
The bill, H. Con. Res. 15, “expresses the sense of the Congress that the Chained Consumer Price Index should not be used to calculate cost-of-living adjustments for Social Security benefits.” Although the bill has 100+ cosponsors, currently only two representatives from Washington state have signed on to the bill, Rep. Rick Larsen (D-2) and Rep. Jim McDermott (D-7).
If you are represented by either of these two Congressmen, please let them know you appreciate their support for protecting Social Security and seniors. If not, please write to your congressional representative and ask them to support H. Con. Res. 15!
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.
By Michael Hiltzik, from the Los Angeles Times
It’s a benefit cut. It’s not merely a “technical” change. It’s not a “more accurate” measure of inflation.
The “chained CPI” has become one of the linchpins of the debate in Washington over what to do about the cost of Social Security. The idea is to ratchet back the annual cost-of-living adjustment provided to recipients by basing them no longer on the standard consumer price index, but this new creature. Its virtue, supposedly, is that it points to a slower inflation rate than the unchained index, by about .3% a year.
But as I wrote in 2011, it’s a stealth benefit cut for seniors. After 10 years, the average Social Security retiree will be getting 3% a year less than under current law; after 20 years it’s 6%. The change is presumed to be almost painless–who would notice a lower cost-of-living adjustment that amounts to three-tenths of one percent. So the proposal has garnered the favor of Democrats in Congress and President Obama, who seem to think they can offer it as a concession to Republicans and get something good in exchange, like a tax increase.
But as economist Dean Baker has observed, that’s a bigger change than the income tax increase levied on the wealthy in the recent budget deal–and Washington thought that was significant enough to battle over it for years.
In recent weeks a white paper endorsing the “chained CPI” has been landing on lawmakers’ desks. “Measuring Up: The Case for the Chained CPI” was produced by an outfit linked to Peter G. Peterson, the hedge fund billionaire whose hostility to Social Security and Medicare is a byword in Washington.
The paper makes a lot of questionable claims. It’s based on the assumption that the “chained CPI” is a “more accurate” measure of inflation, which is only fair. But there are no grounds for that claim.
The “chained CPI” works by incorporating “substitution” into the inflation measure. The idea is that if one thing you buy goes up in price, you’ll buy less of it and more of something similar that hasn’t gone up as much. So your cost of living won’t rise as fast as the straight price increases in the 200 categories of goods and services measured by the CPI. Gala apples shooting up in price? You’ll buy Fujis instead.
A few problems with this: First, the regular CPI already incorporates this sort of substitution. The “chained CPI” looks at more dramatic changes in purchasing patterns–as Social Security’s chief actuary, Steve Goss, observed at a recent event sponsored by the AARP, it’s more like if cars get more expensive, do you put your money into a flat-screen TV instead?
Another problem is that there’s no evidence that seniors make these sorts of changes in their lives. If they don’t, then the regular CPI understates the inflation they face, and the “chained CPI” is even worse. Indeed, the Bureau of Labor Statistics has been experimenting with a price index designed to more closely reflect the purchases of the average senior by overweighting medical and housing expenses; it rises at about .2% faster than the CPI.
Finally, is the “chained CPI” “more accurate”? The only answer is “more accurate for what?” Any CPI version measures only what’s within the index. The “chained CPI” might measure what happens among people who make the substitutions it defines, but for people not making those choices, it’s less accurate. And since the behavior it purports to incorporate is speculative anyway, there’s no way of saying that it’s more accurate at measuring inflation in the real world, or for any particular community of Americans.
Let’s face it. The “chained CPI” is a benefit cut, dressed up in the faux-finery of economic rigor. Can’t Washington be even a teensy bit honest about what it’s up to?
There’s no two ways about it: the Chained CPI is a backdoor cut to Social Security benefits. It has also drawn the ire of many groups, including the Veterans of Foreign Wars (VFW), for it’s slashing of benefits for disabled Americans, survivors, and veterans.
Now, AARP has released a calculator that allows people currently collecting Social Security benefits to see how much their benefit would be cut under the Chained CPI, and predicts what it will be for those not yet retired.
Here are a few examples:
- For a retiree aged 67 receiving the average Social Security benefit of $14,800/year, their total benefit cut after 10 year would be $2,355; after 20 years it would be $8,905, and after 30 years it would be $19,528.
- For a disabled person at age 40 receiving the average benefit of $13,584/year, their total benefit cut after 30 years would be $17,924, and their total benefit cut after 40 years would be $31,307.
Check out the AARP’s Benefit Cut Calculator to calculate how much your benefit would be cut under the Chained CPI.
By Alicia Munnell, from MarketWatch
I am willing to play if our political leaders simply put the facts on the table. For example, the proposal to use a “chained” CPI for indexing Social Security benefits—which was floated during the recent fiscal cliff negotiations, and seems likely to surface again—is not just a “technical correction”; it is a benefit cut.
This “more accurate” measure is projected by Social Security’s Chief Actuary to rise about 0.3 percentage points more slowly each year than the current index. If we were starting with a price index for Social Security that properly reflected the spending patterns of the elderly, then moving to a chain-weighted index might improve accuracy. The problem is that the current index understates the price increases experienced by the elderly, since, for example, it does not reflect the fact that older people spend much more on health care where prices are rising rapidly. An experimental index for the elderly is projected to rise 0.2 percentage points more rapidly than the current index. So moving to a chain-weighted index without correcting for spending patterns is a reduction in benefits.
The 0.3 percentage point decline in indexing associated with switching to a chained CPI may not sound like a big deal. And, indeed, it is not for young retirees. The problem is that the effect cumulates over time and results in substantial benefit cuts for the very old, who are more likely to be women. A COLA that is 0.3 percentage points lower each year would produce a monthly benefit that is about 6.5 percent lower by the time a retiree reaches 85. To compensate, some proposals include a one-time 5-percent benefit increase around age 85. This adjustment helps at that age, but then the cut continues. Even with the adjustment, the COLA change eliminates one fifth of the Social Security 75-year shortfall; it’s a benefit cut.
That said, the COLA is probably fair game in restoring balance to Social Security. It is the only way to have current retirees contribute to the effort. My view is that we – the over 55 crowd – have not behaved very well. It has been very clear since the early 1990s that Social Security would need additional money to maintain current benefits. Yet, the baby boom, instead of raising taxes on itself, kicked the can down the road. Now that we are over 55, we want to foist the burden on younger generations. That does not seem fair.
The conventional argument for protecting Social Security participants is that older workers and retirees do not have the flexibility to adjust to benefit cuts. That is true, and any change to the COLA would have to be applied judiciously. The vulnerable would need to be protected. Thus, COLA changes would have to be implemented on a sliding scale, perhaps based on family benefits. But leaving all those 55 and older untouched no longer seems like the right answer.
In terms of the broader issue of whether Social Security should be part of the budget negotiations, I wish it were not. Its problems are not that serious, and a host of vetted options are available to close the funding gap. The current politically-charged arena doesn’t seem like a very good place to do business. A commission with a narrowly-targeted mandate from Congress and a no-amendments, up-or-down vote similar to the recommendations of the Defense Base Closure and Realignment Commissions seems like a better way to go.
On the other hand, Social Security is in the mix, and it seems hard to argue for not making any change to the program. Any solution will ultimately require some benefit cuts in addition to new revenues. So I am not adamant about having no changes, but I would appreciate it if the negotiators called a spade a spade.
President Obama has proposed to Speaker Boehner a “compromise” that lowers Social Security benefits over 10 years by 3% and over 20 years by 6%. This reduction in benefits is directed at a population whose medium income for those 65 and older is less than $20,000 per year.
The adoption of the Chained CPI proposed by the President, according to economist Dean Baker, significantly underestimates the impact of increased health care costs and other costs unique to seniors.
At the same time, the President proposes to to allow those individuals whose income is over $250,000 per year to continue with their Bush era tax cuts. The higher tax rates in his new proposal would apply only to those who earn $400,000 per year or more.
Furthermore, the White House indicates this is not necessarily their final offer. It probably can and will get worse!
Please call our U.S. Senators and your Congressional Representative again.
Toll free # is 1-888-659-9401. The message is:
- Please do not vote for any compromise that includes cuts to Social Security, Medicare, or Medicaid. These include reducing Social Security benefits by adopting the Chained CPI or Raising the Age of Eligibility on Social Security or Medicare. Please let the President know you, our elected representative, will not vote for such a compromise.
- Please insist that any “compromise” must include an end to the Bush era tax cuts on income over $250,000.
If you have called before, please do it again…it makes a difference. Multiple phone calls are essential!