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It’s looming again—a budget fight over adoption of the “Chained Consumer Price Index” (C-CPI), a proposal to reduce Social Security payments by estimating smaller increases in the cost of living.
C-CPI was one piece of the “Grand Bargain” that President Obama offered House Speaker John Boehner two years ago, but the Speaker rejected it. This year, Obama tried to end the bitter budget dispute that led to the recent government shutdown by again agreeing to House conservatives’ demand for a switch to the C-CPI. Once more, the Speaker rejected the president’s offer.
The clash over how to reduce the national debt continues—fiercely.
• Liberals would raise taxes to provide revenue and leave the “entitlement” programs unchanged.
• Conservatives would cut benefits to programs like Social Security in order to reduce the debt without raising taxes.
“Entitlement” cuts—including the new C-CPI—are still on the table. The chained CPI is promoted as a measure that, according to Congressional Budget Office estimates, will reduce the national debt by $340 billion (not including interest) over 10 years.
But why the current fixation on the national debt? Not all economists believe in the urgency of reducing it. As a percentage of the Gross Domestic Product (GDP), it is much smaller than it was at the end of World War II, and it is already decreasing. As the Great Recession recedes, more people are working and the economy is warming up. In fact, the deficit hit a five-year low this year, 37 percent less than 2012. “There’s no good policy reason to be doing this,” wrote economist Paul Krugman, “because the savings won’t have any significant impact on the underlying budget issues.” It’s wrong to tie the shortfall of Social Security to the deficit, because Social Security has its own source of funds (the payroll tax) and is prohibited from deficit spending.
Do House conservatives know that Social Security provides more than one-third of American seniors with 90 percent of their income? Do they realize that if not for Social Security, nearly half the Americans over 65 would live below the federal poverty level? At a time when 15 percent of Americans — 46.5 million people!—live below the poverty level (income of $23,492 for a family of four), when about 16 million children and 4 million seniors (65 and older) live in poverty, why is reducing their inadequate life support even being considered?
What Can You Substitute for Housing?
The government uses the Consumer Price Index to calculate the cost-of-living adjustment (COLA) for many programs. Currently, the Social Security benefit usually increases yearly to keep pace with inflation. The current Cost of Living Index, called CPI-W, tracks changes in the prices of all goods and services purchased by urban households for their consumption. If the price of a commonly used item increases, the CPI-W reflects that increase.
So how does the Chained CPI work? For a primer, see “Social Security: The Math That Could Hurt Us,” the article I wrote during the 2011 budget crisis. Here’s my “apples-to-pears” example of how “chaining” works:
“The Chained-CPI proposed by the reformers of Social Security differs in that it takes into account the availability of a lower-priced substitute. If, for example, you love apples, and are used to buying some every week, what do you do when their price spikes because a drought has greatly reduced the crop? Do you keep buying apples regardless of cost, or do you switch to pears and bananas until the price of apples comes back down? Since most people, and especially seniors on fixed incomes, would eschew the pricey apples and buy cheaper fruit instead, the C-CPI allows for that and calculates a lower increase in the Cost of Living Adjustment.”
That lower increase translates to reduced benefit payments. The flaw in the reasoning behind the C-CPI is that it doesn’t take into account the difference between the spending patterns of seniors and of wage-earners. The Economic Policy Institute estimates that 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. It notes that in the 18-year period between 1989 and 2007, prices for health care doubled, while overall prices of consumption goods rose by 53 percent.
It isn’t usually feasible to substitute one medication for another, as the C-CPI assumes. Needy seniors either cut their pills in half or do without some meds altogether. They also spend a disproportionately large amount on housing. AARP reports that 59 percent of older renters spend more than 30 percent of their income on housing costs. What recourse do they have when a landlord insists on raising the rent?
The Nation calculates that “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 illustrated by this chart from Social Security Works:
It’s Tougher for Women
The SSA doesn’t identify the gender of the hypothetical retiree in the chart above. As I noted two years ago, however,
“Any reduction in Social Security payments would affect women more severely than men. In the first place, there are more women in the program. Fifty-seven percent of all Social Security beneficiaries age 62 and older are women, and because they live longer, they represent approximately 69 percent of all beneficiaries at age 85 and older. Second, women earn less than men, so they receive smaller benefits. (In 2008, the average annual Social Security income received by women 65 years and older was $11,377, compared with $14,822 for men.) Elderly women are also less likely than men to have significant income from other sources. In 2008, Social Security comprised 50 percent of the total income of unmarried women age 65 and older, but only 38 percent of the income of unmarried elderly men. The Social Security benefits received by 46 percent of all unmarried women represented 90 percent or more of their income.”
Alan Simpson and Erskine Bowles, authors of a proposed deficit-reduction plan, wrote in their letter to the House Ways and Means Committee, “Switching to the chained CPI is surely the right technical, fiscal, economic, and retirement policy. We know the chained CPI is a more accurate and effective way to accomplish the policy goal of maintaining purchasing power in spending programs and serving to index various parts of the tax code to inflation.”
But why are decreasing the national debt and “reforming” Social Security being considered in tandem when Social Security is prevented by law from contributing to the federal deficit? Why the focus on cuts to Social Security and the C-CPI in particular, when there are other ways to keep Social Security solvent? Increasing revenue by raising the cap (in 2014 personal income beyond $117,000 is exempt from Social Security payroll taxes) or raising the rate of the payroll tax would both work.
The problem of Social Security, however, is above all a demographic one. Currently there are more people receiving benefits than workers to pay for them. One solution is immigration reform. The new, young workers would enlarge the workforce and rectify the imbalance. The trustees of Social Security project that even without an increase in revenue, Social Security beneficiaries will receive full benefits until 2033, and three-quarters of scheduled benefits until 2087. In the meantime, the boomer generation, whose great size is putting such a strain on the system, will be gone by 2064. Before then, as their numbers decrease, the ratio of workers to beneficiaries will continue to improve.
Recent and Related:
For the Chained CPI:
The Washington Post editorial board, which considers C-CPI “a more accurate inflation adjustment”
Against the Chained CPI:
Social Security Works October 30 podcast supporting the “Scrap the Cap” movement, which seeks not to cut Social Security, but rather to enlarge it.