Why Obama’s Stealth Social Security Cut Is Bigger Than It Seems

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April 24, 2013 6:41 am
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Last week, while the national media turned its attention to the events unfolding in Boston, the Congressional Budget Office released a report that under normal circumstances have received much more scrutiny.

And if House Republicans eventually relent and agree to return to the normal budget process, it will become relevant once again.

The report addressed and largely affirmed a key criticism of an inflation measure called Chained CPI, which among other things would reduce Social Security cost of living increases and kick people into higher income tax brackets, if adopted across the government.

The implicit finding: Chained CPI — which President Obama included as a compromise measure in his budget — will typically harm seniors more than the rest of the population.Supporters of Chained CPI argue that, unlike the two main existing indexes the government uses, it incorporates the assumption that consumers will substitute cheaper goods for costlier ones when prices rise, counteracting the economic impact of inflation. Thus, they argue, Chained CPI provides a more accurate calculation of inflation, and the ones the government currently uses to index benefits and tax brackets are too generous.

The most common criticism of Chained CPI dismisses the technical accuracy of Chained CPI as an inflation index and points out that benefit cuts and regressive tax increases are undesirable policies, whether they’re effectuated directly or via a technical change to tax and benefit calculations.

But there’s another. In last week’s report, CBO examined an experimental inflation measure called CPI-E, which weights health care and other goods and services more heavily than existing measures of inflation because seniors consume them disproportionately.

What they found is that over the last 30 years, inflation as measured by existing consumer price indices has typically been lower than inflation as measured by CPI-E.

In other words, prices rise faster for seniors than for the population at large — which means slowing the growth of cost of living increases will particularly disadvantage seniors, who are already seeing their living costs outstrip their benefits.

“The possibility that the cost of living may grow at a different rate for the elderly than for the rest of the population is of particular concern in choosing a price index for Social Security COLAs because Social Security benefits are the main source of income for many older people,” CBO writes.

For the past few years, this phenomenon has reversed, thanks in large part to the slowing growth of health care costs and the collapse of housing prices. But that’s likely temporary.

“CBO … anticipates that the CPI-E will outpace the CPI-U in the future.”

The budget office issues some caveats, though, including the inherent difficulties measuring the prices people pay for health care, and accounting for health care quality improvements. Likewise, they suggest modifying CPI-E to take into account the substitution effect.

“If policymakers believe that the CPI-E is an appropriate measure of inflation for the elderly, they could use it to index programs that serve that population,” CBO explains. “A chained version of the CPI-E could also be developed to better account for economic substitution by older consumers, but doing so would require collecting significantly more data about the purchasing patterns of the elderly.”

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