Chained CPI Makes Sense Only Under Certain Conditions

February 20, 2014 at 3:04 pm

We’ve long said that the chained Consumer Price Index (CPI) for cost-of-living adjustments in Social Security and other retirement programs could be a reasonable part of a comprehensive deficit-reduction package — but only under certain conditions.  In the absence of those conditions, the President’s decision not to include the chained CPI in his fiscal year 2015 budget is a sound one.

Many economists believe the official CPI overstates inflation and view the chained CPI as a more accurate measure of overall inflation (although not of inflation faced by the elderly).  On average, the chained CPI grows about 0.25 to 0.3 percentage points more slowly than the official CPI.

Using the chained CPI to index Social Security and other programs would mean that benefits would be a bit lower than under current law.  The proposal in the President’s fiscal year 2014 budget would have reduced benefits for future Social Security beneficiaries by an average of 1 to 2 percent over the course of their retirement.

Since Social Security benefits are modest, and since most beneficiaries have little other income, no one should propose a cut in benefits casually.  We’ve said time and again that the chained CPI is worth considering only if two crucial conditions are met:

  • First, measures to protect the very old and low-income people must be an essential part of the chained CPI; the Administration included these features in last year’s proposal.
  • Second, even with such protections, the chained CPI must be part of a larger budget package that shrinks long-term deficits significantly and does so in a fair and balanced manner by including measures that raise significant revenue in a progressive manner.

This second condition remains well out of reach.  That’s why CBPP President Robert Greenstein stated when the President’s budget was released last year, “Politically speaking, I had thought the White House should not put these concessions [including the chained CPI] in the budget, as distinguished from offering them in negotiations if and when Republicans agreed to dedicate substantial savings from curbing tax credits, deductions, and other preferences (known as ‘tax expenditures’) to deficit reduction.”

Greenstein also predicted, “I am concerned that Republican leaders will adopt the cynical approach of labeling the chained CPI an ‘Obama proposal’ they are willing to accept but only as part of a package that raises little or no revenue and, thus, does not force them to make any sizeable compromises of their own.”  Such an approach would fail to share sacrifices in an equitable manner.

Since that’s exactly what has happened, removing the chained CPI proposal from the budget — while remaining willing to consider it in the context of broader budget negotiations — is an appropriate response.

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More About Paul N. Van de Water

Paul N. Van de Water

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Medicare, Social Security, and health coverage issues.

Full bio | Blog Archive | Research archive at CBPP.org

6 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. carol k garey #
    1

    A chained CPI is not only a bad idea where the low-income are concerned, its a bad idea where the middle class is concerned. Social Security ‘problems’ can be easily remedied and should not be part of any budget because it is not at the heart or even at the fringes of the inequality in incomes leading to less tax revenues and continuing misplaced emphasis on austerity for the middle classes and the lower income in our failure as a society is to tax the capital gains of the upper 5%, in my opinion. It is hard for me to believe that a the President elected on a Democratic ticket should even proposed a chained CPI!

  2. Robert Stern #
    2

    Any cuts to Social Security now, including the chained CPI, imperil the basic premises of the Program and play into the philosophy of those who want to privatize it, Social Security is not funded from the general revenues income tax account where the deficit is. Additional payroll taxes have been paid by baby boomers and their employers over the past 35 years to build a Trust Fund to pay for their full Social Security benefits. The clamor for cuts now is to hide the fact the Bush Administration –and perhaps others- took money out of the Trust Fund and now simply don’t want to pay it back from general tax revenues. Nevertheless, that money was legally and morally obligated for Social Security use and every dollar that was taken out should be restored and used exclusively for that Social Security purpose. A cut now breaks that fundamental contract of the Social Security Program and makes the case for those who now erroneously say that your contibutions into the system wont be there when you retire.. Therefore no cut to Social Security, including the chained CPI should be considered until the Trust Fund runs out.

    • Siouxlouie #
      3

      There is no SS “Trust Fund” in any normal sense of the word. The Federal Government has used the moneys contributed by workers (and their employers) to pay benefits to retired and disabled people. There is an unsecured “special” Treasury bill deposited to the SS account, but that special bill is unsecured and, unlike true U.S. Government securities, cannot be sold or pledged. It is most akin to an IOU left in the cash drawer by an embezzler on his way to the race track. The SS system, like any other Ponzi scheme, continues to work only if there is enough money paid to balance the money paid out.

      • Paul N. Van de Water #
        4

        To the contrary, the Social Security trust funds are invested in Treasury securities that are every bit as sound as the U.S. government securities held by investors around the globe. It’s all explained in my paper “Understanding the Social Security Trust Funds.”

    • Paul N. Van de Water #
      5

      I agree that it’s not essential to deal with Social Security’s financial shortfall right away, but it’s not wise to wait until the last minute — when the trust fund runs out — as you suggest. Social Security’s projected insolvency gives ammunition to the program’s critics and creates needless anxiety about whether, and to what extent, Social Security benefits will be available when today’s young workers reach retirement. Also, acting sooner to restore Social Security’s long-term solvency allows changes to be phased in gradually and affords people more time to adjust their financial plans.

  3. Robert Stern #
    6

    Any cuts to Social Security now imperil the basic premises of the Program and play into the philosophy of those who want to privatize it, Social Security is not funded from the general revenues income tax account where the deficit is. Additional payroll taxes have been paid by baby boomers and their employers over the past 35 years to build a Trust Fund to pay for their full Social Security benefits. The clamor for cuts now is to hide the fact the Bush Administration –and perhaps others- took money out of the Trust Fund and now simply don’t want to pay it back from general tax revenues. Nevertheless, that money was legally and morally obligated for Social Security use and every dollar that was taken out should be restored and used exclusively for that Social Security purpose. A cut now breaks that fundamental contract of the Social Security Program and makes the case for those who now erroneously say that your contibutions into the system wont be there when you retire.. Therefore no cut to Social Security, including the chained CPI should be considered until the Trust Fund runs out.



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