Monday, March 18, 2013

Chained CPI Could Relieve the National Debt. So What Is It? 

Check out the next entry, has a lot of options for reducing the deficit.
Updated: December 12, 2012 | 7:07 p.m. December 12, 2012 | 4:40 p.m.
AP Photo/Matt Rourke
Shopper Ann Murphy gathers produce at a WalMart in Deptford N.J.

There’s one deficit-reduction idea in Washington that sounds like a no-brainer. It’s a single tweak that could raise about $72 billion in tax revenue and cut spending by about $145 billion through 2021, according to the Congressional Budget Office’s 2011 calculations. It could be enacted quickly, and would ramp up so slowly that it could be 10 years before anyone notices they’ve been hit by both a tax increase and a benefit cut.

But in Washington, no solution is ever that simple—particularly when it involves Social Security. Tying parts of the tax code and certain federal benefit programs to a new consumption metric, called the “chained CPI,” is an idea that almost everyone supports in theory but hardly anyone is willing to risk in practice.

“It’s a more accurate cost-of-living adjustment, and that certainly recommends it,” said Jared Bernstein, a former White House adviser and a senior fellow at the Center on Budget and Policy Priorities. But “it’s a benefit cut, and it’s a benefit cut that grows as you age, because the more you age, the more the difference compounds over time,” he said.

Switching to the chained CPI is a mainstay of deficit-reduction recommendations, and President Obama and House Speaker John Boehner floated the idea during the 2011 debt-ceiling negotiations. It’s unclear, though, whether the switch will gain much traction this time around.

Here’s how the new metric would save money: Social Security, federal pensions, and military and veterans’ benefits are indexed to rise each year with inflation; so are tax brackets, exemptions, deductions, and credits. But experts say the consumer price index the government currently uses overstates how rising prices affect household spending.

The Bureau of Labor Statistics has come up with a more accurate measure, which accounts for consumers’ tendency to switch to cheaper categories of products when prices rise. Rather than looking at a fixed set of goods—as the standard formula does—the new measure looks at how the set of goods changes, and then “chains” two consecutive months of consumption data together.

The chained CPI rises a little more slowly than the current measure. So if the chained CPI were used to calculate cost-of-living increases, it would mean smaller increases to Social Security checks each year. If the chained CPI were applied to the tax code, it would move taxpayers into higher tax brackets faster.

Opponents of the chained CPI say that it would unnecessarily cut Social Security and other benefit programs, burden the oldest and sickest Americans, and hit almost everyone with a tax increase. The deficit-reduction plans floating around Washington—such as the Simpson-Bowles plan—recommend that a switch to chained CPI involves additional protections for the most-vulnerable beneficiaries.

That caveat still doesn’t make chained CPI an appealing policy option, said Andrew Biggs, resident scholar at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration.

“I’m not sure you want to go wholesale change to the chained CPI. One reason is, it’s not based on the purchasing habits of the elderly,” Biggs said. The consumption patterns of a working household aren’t the same as the consumption patterns of, say, an 85-year-old Alzheimer’s patient living on a fixed income.

Advocates for the elderly agree. “If you’re going to say that you’re doing this for the sake of accuracy, then let’s be fair,” said Cristina Martin Firvida, AARP’s director of government relations for economic security. Because health care costs are rising faster than inflation, and seniors spend a lot of money on health care, cost-of-living adjustments should reflect that, she said.

AARP favors an experimental metric, the CPI-E, which attempts to calculate the spending habits of the elderly. The problem with that metric is that it wouldn’t do much to slow the growth rate of Social Security payments; in fact, it could actually make payments grow faster.

Social Security’s annual cost-of-living increases have a history of inflaming partisan passions. In 1985, Senate Republicans passed a bill that would have capped the cost-of-living increase in Social Security. Democrats used the vote to brand GOP senators as a threat to the program. “That’s why we lost control of the Senate in 1986,” said Steve Bell, senior director of economic policy at the Bipartisan Policy Center.

During current deficit-reduction negotiations, the Obama White House and Senate Democrats have been emphatic that Social Security must remain off the table. “Social Security is not currently a driver of the deficit. That's an economic fact,” White House press secretary Jay Carney said last month. AARP and other advocacy groups have been making the rounds on Capitol Hill, reminding lawmakers of their campaign promises not to touch entitlements for current retirees.

“This, to me, is symbolic of how attached people are to the status quo,” Bell said. Social Security checks would still go up every year if the chained CPI was used to calculate them—just not by as much. The fact that lawmakers can’t even find a way to address the growth rate of benefit payments is symptomatic of a larger problem, he said.

“We face $10 trillion of new debt over the next 10 years, more or less, and we’re sitting here discussing and fighting over a reduction in the rate of increase,” Bell said. “Can you imagine how hard it will be for us to get any significant, large, I mean real, deficit deal?”

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