Would a ‘chained’ inflation index result in big benefit cuts for Social Security?

at 06:00 AM ET, 11/13/2012


(Toby Talbot/AP)

“What it would mean if the Chained CPI [consumer price index] would go through is that if you are 65 today, by the time you are 76, your benefits would be cut by about $560 a year. … and about $1,000 a year when you turn 85. To my mind, that is just not satisfactory. We're just not going to allow that to happen. Seniors who are trying to live on $1,400 a year cannot in 10 years deal with a $560 cut, and when they're 85, they could not deal with a $1,000 a year cut. That's wrong.”

— Sen. Bernie Sanders (I-Vt.), Nov. 12, 2012

When President Obama tried to reach a “grand bargain” with Republicans on the deficit in 2011, he floated the idea of changing the cost-of-living adjustment for Social Security benefits from the traditional consumer price index (CPI-W) to something called a “chained CPI.”

 Essentially, that means an assumption is made that when prices rise, people will turn to a less expensive product, such as buying chicken instead of beef.  Thus, the chained index tries to take into account how people react to inflated prices.

 This arcane issue will likely loom large in the upcoming budget debate over the so-called “fiscal cliff.” The chained CPI is appealing to budget wonks because it only slightly tweaks the inflation formula (essentially, a reduction of 0.3 percent). But the impact of that shift builds up over time, potentially saving more than $100 billion in just 10 years.

 But many liberals don’t like the idea of reducing potential benefits. We are often wary when lawmakers begin using the word “cut,” and we were struck by Sen. Sanders’s comments on Monday, especially the idea that the cuts would be so draconian—a $1,000 cut from $1,400 a year. Let’s examine what’s going on here.

 

The Facts

 First of all, Sanders misspoke. He meant to say $14,000 a year, not $1,400 a year, according to his staff. As we frequently tell readers, we don’t try to play a game of gotcha here. How does the rest of his math work out?

It is important to remember that these are only estimates far in the future. Moreover, benefits would continue to grow over time, just at a slightly slower pace — so the actual reduction from projected benefits amounts to only about $4 a month.

 That does not sound like much, but over time it could mean real money — to the Treasury and to retirees.

The Social Security actuary estimated that by age 75 the benefit would be between 96 and 97 percent of current projected benefits. By age 85, the benefit would be between 93 and 94 percent. Someone living until 95 would see just over 90 percent of today’s benefits.

 Translated into today’s annual benefit level, that amounts to $560 lower at age 75 and nearly $1,000 lower at age 85.

 The question is whether this is an appropriate level for Social Security benefits. Even with this shift, Social Security faces a long-term shortfall, potentially putting at risk the payment of full benefits. Sanders in fact wants to shift to an elderly-specific CPI, which he argues would more accurately keep pace with rising costs for health care and prescription drugs. But that would boost benefits over time, putting even more pressure on Social Security’s long-term finances. 

Moreover, Social Security is relatively unique among pensions in that it even has cost-of-living adjustment.

 Instead of reducing future benefits, Sanders proposes to have the wealthy pay Social Security payroll taxes on income above $250,000 — a proposal Obama had embraced in the 2008 campaign. Currently, the Social Security tax is halted once income goes above $110,000, in contrast to Medicare, which has no income cap.

For more on the financing of Social Security, read our popular Social Security primer.

 

The Bottom Line

 We are not going to award Pinocchios for Sanders’s misstatement, especially since the math behind the rest of his statement appears sound.

 Yet lawmakers should be careful about using the word “cut” when speaking about future benefits. Some might argue that the current CPI used by Social Security has artificially inflated benefits over time, and this relatively small shift would be an important corrective.

 Even with the shift to a chained CPI, benefits will continue to increase over time. It  would be more accurate to say that future benefits might not keep pace with inflation — especially when there are legitimate questions about whether a broad consumer price index adequately reflects the price inflation faced by the elderly.

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    About the Blogger

    Glenn Kessler has covered foreign policy, economic policy, the White House, Congress, politics, airline safety and Wall Street.

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