Proposed CPI Formula Would Reduce Social Security Increases

by Don Azarias
January 16, 2012
Come 2012, 55 million Social Security recipients will get their first benefit increase in three years. However, Congress is looking at reducing future raises by adopting a new measure of inflation that also would increase taxes for most families. And, to add insult to injury, the biggest impact will fall on those with low incomes.
If Congress passes this legislation, it will, most likely, be signed into law by President Barack Obama because the proposal to adopt a new Consumer Price Index (CPI) was the idea that was floated by his administration. It would result in smaller future increases for veterans’ and current military personnel’s benefits and also pensions for federal workers.
Taxes would go up by $60 billion over the next decade because annual adjustments to the tax brackets would be smaller, resulting in more people jumping into higher tax brackets because their wages rose faster than the new inflation measure. Annual increases in the standard deduction and personal exemptions would become smaller.
As expected, the opposition from seniors groups was fierce and unrelenting. However, the proposal is gaining momentum and has the support of mainstream economists and analysts. Changes at first would be small——the Social Security increase would be cut by just a few dollars in the first year. But the impact, as well as savings to the government, would grow over time, generating about $200 billion in the first decade and much more after that.
The debt panel consisting of six Democrats and six Republicans is struggling to come up with a plan to reduce government red ink by at least $1.2 trillion over the next decade. And while the new CPI formula would only have a minimal impact on debt reduction, it’s still a welcome solution to reduce the United States’ unsustainable debt.
The proposed inflation measure will be called the Chained Consumer Price Index, or chained CPI. On average, the measure shows a lower level of inflation than the CPI formula currently being used.
The new measure would reduce Social Security cost-of-living adjustments, or COLAs, by an average of 0.3 percentage points each year, according to the Social Security Administration. The 2012’s increase, the first since 2009, will be 3.6 percent. Under the new CPI, yearly benefits for a typical 65-year-old would be about $136 less, according to an analysis of Social Security data. At age 75, annual benefits under the new index would be $560 less. At 85, the cut would be $984 a year, and at 95, the annual income loss would amount to $1,392.
“I think the thought process behind this is, slip this in, people won’t understand it,” said Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare. His group is spending millions of dollars on radio, TV and direct mail ads to fight cuts in Social Security and Medicare. To the congressional lawmakers, he had this to say: “Don’t believe that taking this approach to cutting Social Security will not be noticed. You will pay for it.”
And, not to be outdone, a TV ad by American Association of Retired Persons (AARP), provided this message: “We are 50 million seniors who earned our benefits, and you will be hearing from us today and on Election Day.”
However, a group calling itself the Moment of Truth Project, which was organized to promote the deficit reduction package, supports the new inflation measure. It had issued this statement: “Rather than serving to raise taxes and cut benefits, switching to the chained CPI would simply be fulfilling the mission of properly adjusting for cost of living.”
According to the Associated Press (AP), many economists and analysts believe that the use of CPI formula is more accurate because it assumes that as prices increase, consumers will switch to lower cost alternatives, reducing the amount of inflation they experience. For example, if the price of beef increases while the price of pork does not, people will buy more pork. But to counter that, those who are opposed to this idea will argue that, if the price of home heating oil goes up, people will turn down their heat and wear more sweaters. I find this humorous but it makes sense.
Moreover, the Congressional Budget Office (CBO) agrees that adopting CPI measure would reduce Social Security benefits by $112 billion over the next decade while federal civilian and military pensions would be $24 billion lower.
If adopted across the government, fewer people would be eligible for many anti-poverty programs because the poverty level also would increase at a lower rate each year. That would result in fewer people living below the official poverty line, despite having the same income. The tax increases would hit low-income families the hardest, while high-income taxpayers would see smaller changes. The wealthiest taxpayers already pay taxes at the highest marginal rate, currently 35 percent.
In an election year, those lawmakers will do everything to avoid political backlash from voters. It’s quite interesting to note that some of them see the new inflation measure as a way to help break the stalemate on Capitol Hill over tax increases and cuts in benefit programs. Deadlocked along their respective party’s platforms, Republicans adamantly oppose tax increases, while Democrats have said they won’t support benefit cuts without a substantial increase in revenue.
Meanwhile, Rep. Xavier Becerra (D-California), a member of the bipartisan debt panel had this to say: “If you’re going to simply try to save money by changing the CPI, you can do that. But then be up front and tell seniors what you’re doing. You’re throwing them under the bus to save money.”
Like one of those senior citizens who depend on his social security check each month, I applaud Rep. Becerra for his stance on this matter. Or is he just saying those words in order to lengthen his political life span? As a Republican, I have my doubts because everyone knows that this problem was exacerbated by the Democrats’ support for those unaffordable social service programs and only made worse by the Obama’s health care reform law.
But I make no apologies for those seniors who are recipients of social security benefits. Let’s not forget that they contributed a lot of their own money into the system. It would be morally wrong for the government to shortchange them.