The Chained CPI: A Response to Robert Kuttner

December 19, 2012 at 12:45 pm

The President’s decision to include, in his latest “fiscal cliff” offer to House Speaker John Boehner, a proposal to use the “chained Consumer Price Index” in calculating both annual cost-of-living adjustments in Social Security and other benefits and annual inflation adjustments to various features of the tax code (such as the incomes at which tax brackets begin and end) is eliciting dismay among many progressives.

At CBPP, we have long been open to such a change if, and only if, the tax savings are devoted entirely to deficit reduction (not to financing other tax cuts) and the benefit change includes protections for poor and very old beneficiaries.  The details on the Administration’s proposal are not yet available and, until they are, we’re withholding judgment on it.

But, my old friend Bob Kuttner attacked us yesterday on The American Prospect’s website for our openness to the chained CPI.  Bob’s piece merits some response.

First, Bob portrays the chained CPI as a massive Social Security benefit cut.  “On average,” he writes, “the cut is about 3 percent a year.”

But, the average cut isn’t 3 percent per year.  It’s three-tenths of 1 percentage point per year (0.3 percent), according to the Social Security actuaries, or one-tenth what Kuttner assumed.  And according to the Congressional Budget Office, the average reduction would be a bit smaller than that — 0.25 percent per year.

To be sure, the benefit loss would cumulate over time; after 20 years, it would represent a benefit cut of about 5 to 6 percent.  But, the proposal also appears to include a benefit increase after about 20 years that’s equal to 5 percent of the average Social Security benefit, returning the benefit level at that point to close what it would be under current law.  (It would begin to slowly erode again after that.)

In short, this proposal would affect beneficiaries.  But the benefit reduction is much smaller than Kuttner portrays it.

That leads me to my main disappointment with Bob’s piece.  The bulk of it purports to describe my thinking and motivation for being open to what he considers a horrific proposal.  Alas, Bob invents some of what he writes out of whole cloth.  He never talked to me about why I end up where I do on this issue, and he gets much of my thinking wrong.

Let’s quickly dismiss a Kuttner canard.  He lays out a series of reasons why he assumes I’ve adopted this view and suggests that one could be to strengthen my access to the Obama White House.  That makes no sense.  I have been writing about the chained CPI along the same lines since 2004, when Barack Obama was still serving in the Illinois state legislature.

So what is my thinking?  I share concerns about the effects of the chained CPI on beneficiaries.  But I think that some benefit cuts in Social Security are inevitable sooner or later.  The program needs some changes to make it solvent for the long term, and the chances that policymakers will restore solvency entirely through tax increases — with no benefit-reduction component — are essentially zero.  That didn’t happen in 1983, and it almost certainly won’t happen now or in the foreseeable future.

Furthermore, as in 1983, benefit changes won’t be limited to high-income beneficiaries.  There are limits to how far one can cut benefits at the top without breaking Social Security’s link between payroll-tax contributions and benefits, and thereby risking undermining public support for the program.  I see these factors as basic political realities, whether we like them or not.

That brings me to the key point: the chained CPI is the only Social Security benefit change that brings an increase in general tax revenues with it.  Eventually, about half of the savings from the chained CPI come from revenues, and about half from Social Security and other benefit programs.  The more that we raise in revenues, the less that policymakers will slash programs generally.  So, this — and the fact that the chained CPI is a more accurate measure of inflation (although not necessarily for the elderly) — leads me to conclude that if policymakers can build appropriate protections into the chained CPI to protect both the oldest and the poorest beneficiaries, it’s worth considering.

Finally, I hope people reading Bob’s article don’t think I’m the sole liberal who’s open to the chained CPI.  The late, revered Bob Ball — the former Commissioner of Social Security who led efforts to defend the program for half a century and was a hero and beacon on social insurance issues to so many of us — put forth several Social Security plans that included the chained CPI as a way to help restore Social Security solvency.  Indeed, I first looked at the proposal after I saw that Bob Ball had included it in one of his plans.  The Center for American Progress also embraced the chained CPI several years ago and included the proposal in its Social Security solvency plan.

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More About Robert Greenstein

Robert Greenstein

Greenstein is the founder and President of the Center on Budget and Policy Priorities. You can follow him on Twitter @GreensteinCBPP.

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

4 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. Mark Jamison #
    1

    While I think I understand and appreciate your reasoning on this I have to wholeheartedly disagree with your conclusions. Allowing the Right to make an issue of the safety net and bring Social Security into the current fiscal discussions simply furthers their long term goal of undermining these sorts of programs. If Progressives allow this to be put on the table then they have essentially ceded the terms of the argument to the Right.
    Moving to the chained CPI hurts the most vulnerable – it also affects Veteran’s Benefits. The current CPI doesn’t reliably reflect the sort of prices pressures that seniors and those towards the bottom of the economic spectrum feel. Chained CPI may be more accurate for some economic modeling but in the real world its impacts are beyond painful.
    Social Security is in a basically healthy position. Some tweaks to the payroll tax and benefit payouts at the top and it can be extended indefinitely. The focus must be on Medicare and that focus must be on the fact that medical costs in this country are double those in other countries. Our long term deficit problems are directly attributable to medical costs and the current argument shifts what should be our primary focus.
    You may have a reasonable technical position but politically it feels very much like surrender.

  2. Jeff K #
    2

    You say that any deal to improve the solvency of Social Security will include benefits cuts.

    That may or may not be true, however, I see no plan in front of us to address Social Security solvency. If there were such a plan as you say it would include increases in Social Security revenues, such as eliminating the cap on the 1.8% disability cap or returning the cap to a 90% level of all income.

    This is a 100% benefit cut to Social Security without any increase in Social Security revenues.

    That is why the CPI COLA cut on Social Security benefits should not be part of this deficit agreement.

  3. Tom Richardson #
    3

    If the proposal was being made out of sincere concern to sustain Social Security over the long run, I might agree with you. However, the following factors make me completely opposed to it at the present time.

    1) Social Security has nothing to do with the ‘fiscal cliff’, e.g., the expiration of the Bush tax cuts and the implementation of the BCA sequester, that are providing the urgency behind the current negotiations.

    2) The simplest and most obvious correction to Social Security is to reverse the erosion of the payroll tax cap and restore it to the level at which it covers 90% of wage income, as it did after the last reform in 1983.

    The lack of the second proposal and the circumstances of the first tell me that the CPI change is an opportunistic attempt to use the time pressure of the fiscal cliff negotiations to get a cut to Social Security benefits. The opponents of Social Security are willing to play with a long time frame, and to them, this would be a victory more for precedent than for the size of the cut.

    I have other reasons for opposing it, but I will make only one additional comment. If we start to see bracket creep on taxes as a result of the CPI change, you can be sure that brackets will be reset to use ordinary CPI, but Social Security benefits will not.

  4. bmull #
    4

    I’m horrified by CBPP’s decision to support Obama’s chained CPI plan. The present debate is not about fixing Social Security. It’s about a short-term budget deal. None of the new tax revenues (which you fail to mention are highly regressive) are earmarked for Social Security. If you look at Reagan’s 1983 deal, as bad as it was, at least it was a comprehensive plan which significantly improved Social Security’s finances. It did not muddle the crucial distinction between Social Security and the general budget mess. The precedent of cutting entitlements primarily to get the federal government off the hook for interest payments to the trust fund is a horrible one.

    The federal government used money from the trust fund to pay for tax cuts for the rich, two unnecessary wars and a fatcat-induced financial crisis. Now, they’re making the trust fund cut its outlays so it won’t need that money back on Obama’s watch. People making up to $400,000 meanwhile get to keep their Bush tax cuts, their dividend cuts, their estate tax cuts, and a number of other scheduled policy changes that would otherwise cost the rich disproportionately. Does that sound fair or does it sound like a scam? I have seen first-hand how important it is for seniors to be financially secure, so they can participate in the children’s and grandchildren’s lives. It’s very sad when they have to live far away in low-income areas and can’t afford even to buy Christmas gifts. FDR must be rolling in his grave.



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