The chained CPI: A sucker's bet for the GOP

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Article Highlights

  • The chain-weighted Consumer Price Index - or "chained CPI" - isn't great policy for Social Security.

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  • The chained CPI would cut benefits for the old, who make up a share of the very poor.

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  • While the chained CPI proposal would fix a fraction of Social Security's deficit, it’s not Social Security reform.

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  • The chained CPI isn't the only Social Security reform on the table, and it's certainly not the best one.

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I happen to think that the chain-weighted Consumer Price Index - or "chained CPI" - isn't great policy for Social Security. It measures lower inflation than standard CPI indices, meaning smaller annual Cost of Living Adjustments (COLAs). This would cut benefits for the wrong people - the very old, who make up a predominant share of the very poor - while leaving untouched the upper-income 62-year old retiree, who really should work longer and get less from the government. And while the Obama administration's chained CPI proposal would fix only a fraction of Social Security's long-term deficit, passing it would give Congress the impression that they've "done" Social Security reform and need not bother with the other $7 trillion in changes need to make the system solvent.

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But the chained CPI really isn't being proposed as a Social Security reform, as a way to make the program more solvent or better-functioning. True Social Security reforms think about ways to better protect the poor, or to encourage longer work lives, or increase retirement saving. The chained CPI, by contrast, is about producing savings within the 10-year budget scoring window. Because it cuts benefits for current retirees, the chained CPI is the only Social Security reform to generate money immediately and make the numbers on a broader deficit reduction package add up. Hence its popularity among both GOP leaders and the White House.

And yet the White House chained CPI plan would do less to fix Social Security than you'd think. The core of the chained CPI is that it cuts benefits for old people - the older you get, the bigger the cut. Not exactly great policy, as I said, but it at least produces some savings for Social Security and the budget. But in response to criticism over cutting benefits for old people, the White House proposal would include a benefit increase for old people. Beginning at age 76, retirees would receive a phased-in benefit increase of around $800 per year. For low-income retirees, this would more than make up for the effects of the chained CPI. Then again at age 95, retirees would receive another benefit increase. The White House's budget proposal didn't include any estimates of how the overall package would affect Social Security's finances - probably for good reason - but my guestimate is that the benefit bump ups would claw back around one-third of the saving from the chained CPI. Meaning that, despite the brouhaha from the left, the chained CPI probably fixes only around 15 percent of Social Security's long-term deficit.

So it's not clear to me the chained CPI is really worth having in the first place. But what do Republicans have to give up in order to get this non-fix?

Part one is that the chained CPI is also a tax increase, and over the long term it actually collects more dollars than it cuts. Currently, most income tax credits and deductions, along with the dollar values attached to different income tax brackets, are indexed to inflation. Using a lower inflation adjustment would reduce the value of credits and deductions and push a greater share of workers' incomes into the higher tax brackets. Result: higher taxes, and particularly so on low and middle class households. While the Social Security cuts max out at around 3 percent of annual outlays, the income tax increases continue forever. Over the first decade the chained CPI would cut spending by around $130 billion and raise taxes by around $100 billion, but over the second decade and beyond the chained CPI is predominantly a tax increase.

But it doesn't stop there. In order to get the Obama administration to agree to this small spending cut coupled with a larger tax increase, Republicans must go along with yet more tax increases. The Obama budget contains the so-called "Buffet Rule," which would effectively double the capital gains tax rate paid by high-income houses. The budget also would limit deductions for high-income tax filers, as well as capping the tax deferment for high-balance retirement accounts. Republicans surely would talk at least some of these tax increases out of any eventual budget deal, but it's a bad sign for conservatives when they must negotiate down the conditions for signing onto a provision that is itself a net tax increase.

No doubt, now that President Obama has gone out on a limb by proposing the chained CPI, there's a temptation by many in the GOP to get out the saw. But we're too deep in the budgetary hole to be playing that game. Yet we also need to forgo small and potentially counterproductive budget gains if they push off prospects of truly successful entitlement reforms. And to be truly successful, reforms to Social Security - as well as Medicare and Medicaid - need to be comprehensive and far-reaching. Simply tweaking around the edges, as the chained CPI would, won't do the job.

Republicans shouldn't undercut the President so much as up the ante: propose Social Security reforms that protect the old and the poor but cut costs by reducing benefits for higher-income retirees and improving incentives for saving and longer work lives. For instance, a universal flat benefit could eliminate poverty in old age at half the cost of the current Social Security program. Automatic enrollment in retirement savings accounts could build real saving and investment. Eliminating the payroll tax for older workers could encourage longer work lives, improving retirement security and boosting GDP. Coupling a low initial benefit with COLAs that rise faster than inflation could both discourage early retirement and help the oldest retirees who are in greatest danger of poverty. The chained CPI isn't the only Social Security reform on the table, and it's certainly not the best one. Republicans should look further.
 
 Andrew G. Biggs is a resident scholar at the American Enterprise Institute. He previously served as principal deputy commissioner of the Social Security Administration. 

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