Wonkbook: The trick of chained-CPI

April 8, 2013

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(AP Photo/Susan Walsh, File)
(AP Photo/Susan Walsh, File)

Liberals are not pleased by the news that the Obama administration intends to include chained-CPI -- a Social Security cut that's long been a top priority for Republicans -- in this week's budget. The AFL-CIO, for instance, calls it "unconscionable." A cynic, of course, might suggest that this is all a necessary part of the White House's plan: How will conservatives know the Obama administration conceded anything unless liberals are loudly, vocally upset?

But if Peter Orszag, Obama's first budget director, is right, perhaps there's less for liberals to be upset about than meets the eye. "What neither side seems to have noticed, however, is that the difference between the chained CPI and the standard CPI has been diminishing," he writes in Bloomberg View. "That means the impact of switching indexes may not be as great as many assume."

"Chaining CPI" saves money by switching the government to a slower measure of inflation. That slower measure of inflation means Social Security slows down the cost-of-living increases built into its benefits. It also increases taxes, albeit by less than it cuts spending, by moving people into higher brackets more quickly.

That's the trick of the policy: It doesn't make any cuts or raise any taxes directly, it just uses a supposedly more accurate measure of inflation to make opaque cuts automatically. But that means the cuts and taxes all depend on what happens to that new measure of inflation.

When you hear how much money chained-CPI saves, Orszag says, that's assuming "that the chained index grows 25 to 30 basis points more slowly than the standard indexes do." And since 2000, that's been about the average. But the average misses a deceleration in recent years.

"From January 2000 to January 2003, the annual increase in the chained index was 47 basis points lower than that in the CPI-U. From 2003 to 2006, the difference was 31 basis points. From 2006 to 2009, it dropped to 15 basis points. And over the past two years, the average difference has been just 11 basis points."

If the slowdown holds, chaining CPI won't save as much money as its proponents hope or its critics fear. That's not to say it'll save no money: Orszag estimates it'll still bring in $150 billion in the next decade, and the savings will grow sharply in the decade after that.

It's also possible, of course, that the slowdown was a temporary feature of the recession, and it will reverse itself in the coming years, and the gap between the two measures could even widen beyond the 25-30 points budget analysts expect, meaning chained-CPI will save more money than expected. As they say, predictions are hard, especially about the future.

Wonkbook's Number of the Day: $30 billion. That's the total economic cost, according to a new study from the American Action Forum, of the regulatory burden from immigration paperwork. The U.S. spends nearly 100 million hours a year on it, and 40.6 million on the I-9 form alone. 

Wonkblog's Graph of the Day: The long-term unemployment problem.

Wonkbook's Top 5 Stories: 1) is immigration reform a week away?; 2) how Obama would save money on retirement programs; 3) does a possible Manchin-Toomey deal mean gun control's fortunes looking up?; 4) disability insurance debate continues; and 5) big hurdles emerge for Obamacare.

1) Top story: Is immigration reform a week away?

Schumer says Senate gang will have agreement by week's end. "The Senate’s third-ranking Democrat expressed hope Sunday that a bipartisan group he belongs to will come to an agreement on a proposal to revamp the nation’s immigration laws by the end of the week. “I think we’re doing very well. I think that we hope that we can have a bipartisan agreement among the eight of us on comprehensive immigration reform by the end of this week,” New York Sen. Chuck Schumer said on CBS News’s “Face The Nation.”" Sean Sullivan in The Washington Post.

...Or will the legislation see delays? "A bipartisan Senate group on immigration legislation is attempting to craft an agreement so secure that the eight members will oppose amendments to its core provisions, an arrangement that could delay the introduction of a bill, people familiar with the negotiations said. The senators had said they hoped to present their proposals this week, but Republican members expressed skepticism about that timetable Sunday." David Nakamura in The Washington Post.

@Matthew_C_Klein: Ultimate #slatepitch: America's immigration policy is perfect the way it is. 

Study finds high economic cost of immigration system. "Critics of America’s immigration system point to many flaws and shortcomings within it, but here’s one critique that has gotten relatively little attention: It’s an expensive and burdensome regulatory labyrinth...Individuals and businesses devote 98.8 million hours to immigration-related paperwork annually, at a cost of approximately $30 billion...The study finds, for example, that there are 234 government forms related to immigration, emanating from seven different agencies, including 116 forms produced by the Department of Homeland Security alone...U.S. residents and their employers spend 40.6 million hours annually tackling the I-9 process, the study says." Gerald F. Seib in The Wall Street Journal.

Will Obama agree to border-security 'trigger'? "Senior White House adviser Dan Pfeiffer on Sunday sidestepped questions about whether President Obama would sign an immigration bill which included a “trigger” requiring border security improvements before other reforms...Reports have suggested that conservative members of the immigration “Gang of Eight” are pushing measures which would require the administration to meet border security benchmarks before allowing other controversial provisions, including a pathway to citizenship for illegal immigrants already in the country, from being implemented...Administration officials have previously said they would object to any provision tying a pathway to citizenship to border security goals." Carlo Munoz in The Hill.

Many undocumented workers have illegally overstayed their visas. "Proponents of overhauling the U.S. immigration system increasingly point to the fact that about 40% of the 11 million undocumented workers in the country aren't low-wage workers who sneaked over the southern border illegally, but rather foreigners who arrived legally and simply never left...Madeleine Sumption, a senior policy analyst at the Migration Policy Institute, a nonpartisan think tank, said that "visa overstayers would benefit more from a legalization program. They have higher levels of skills but are being held back by their legal status."" Sara Murray in The Wall Street Journal.

SALAM: Why is immigration reform taking so long? "The basic problem is beautifully illustrated by two little controversies, one sparked by liberals and the other by conservatives. On the left, there is a widely held belief that U.S. immigration laws are far too stringent, and that we’re not doing enough to help low-income immigrants become citizens. On the right, there is an equally common conviction that U.S. immigration laws should not, as a general rule, have the effect of expanding the number of people who depend on means-tested government benefits to maintain a decent standard of living." Reihan Salam in Reuters.

LUCE: The H1-B reform goes nowhere near far enough. "[The bill looks likely to fudge a rare chance to link the US immigration system to the rising pressures of a hyper-competitive world. The H1B quota is likely to rise to about 115,000 a year. And the bill may include a green card for anyone graduating in Stem (science, technology, engineering and mathematics). This would be real progress. But the quotas will still be tiny and the annual limits will continue to be set by Washington." Edward Luce in The Financial Times.

Music recommendations interlude: Fado, a genre of Portuguese music now in revival.

Top op-eds

SUBRAMANIAN: The global convergence. "[T]he golden age of global economic growth, which began in the mid-to-late 1990s, has mostly survived. These continue to be the best of economic times...What we are seeing today, despite the crises, is convergence with a vengeance. An unequal world is becoming less so." Arvind Subramanian in The Financial Times.

ORSZAG: Chained CPI's diminishing returns. "What neither side seems to have noticed, however, is that the difference between the chained CPI and the standard CPI has been diminishing. That means the impact of switching indexes may not be as great as many assume. The change may still be a good idea, but it probably won’t matter as much as expected. A decent guess is that, over the next decade, the effect on the deficit of adopting the chained index would be less than $150 billion. Social Security benefits even 20 years after retirement would be reduced by less than 2 percent." Peter Orszag in Bloomberg.

DIONNE: The end of majority rule? "Universal background checks are supported by 91 percent of Americans. Yet there is enormous resistance in Congress to passing a strong bill to keep arms out of the wrong hands. What does “rule of the people” mean if a 9-to-1 issue is having so much trouble gaining traction?...At the moment, our democracy is not very democratic." E.J. Dionne in The Washington Post.

BUCHANAN: Economists do it with models, and why that can be dangerous. "[S]ome economists are beginning to pursue a rather obvious, but uglier, alternative. Recognizing that an economy consists of the actions of millions of individuals and firms thinking, planning and perceiving things differently, they are trying to model all this messy behavior in considerable detail. Known as agent-based computational economics, the approach is showing promise." Mark Buchanan in Bloomberg.

DICKERSON: Why there's a chance Washington might work. "That these are national issues is demonstrated by the cast of characters looking to make a name for themselves by rushing into the action. If nothing else, hearing about Sens. Schumer, Manchin, Cruz, Rubio, and Paul is a refreshing break from all the coverage of Obama, Boehner, Cantor and McConnell. There is activity on all three issues—not all of it in a positive direction—but unlike the grinding slowness of the last few years, at least there is ferment and activity." John Dickerson in Slate.

Economic history interlude: How the music industry has changed over 40 years, in one 40-second GIF.

2) How Obama wants to save money on retirement programs

Obama to propose $35B in savings on federal-employee retirement programs. "In a briefing with White House reporters, a senior administration official indicated the budget savings would come through increased charges to federal employees for their retirement benefits. The savings figure was not included in new documents provided to reporters, but the White House indicated the budget will incorporate savings outlined in an administration’s previously released plan to reduce the deficit." Joe Davidson in The Washington Post.

Obama's chained-CPI proposal draws criticism. "Switching to the so-called chain-weighted consumer-price index would reduce the growth of future benefits from Social Security and other federal programs. The proposal, expected in Mr. Obama's budget due to be released Wednesday, is likely to solidify Democratic support in Congress for making the switch, particularly among party leaders. Many moderate Democrats and even some liberals support the idea, arguing it could help stave off bigger cuts to government programs in the future." John D. McKinnon in The Wall Street Journal.

The AFL-CIO, in particular, is not pleased. "It's unconscionable we're asking seniors, people with disabilities and veterans to be squeezed of every last penny when corporations and the wealthiest 2% are not paying their fair share of taxes, despite soaring profits...The 'chained' CPI is based on a fraudulent premise - that the CPI is rising faster than the actual cost of living experienced by seniors, veterans and millions of other vulnerable citizens living on meager incomes. In fact, because seniors in particular have limited flexibility and spend a disproportionate share of their income on health care, they tend to experience more rapid inflation than the general population. Damon Silvers at the AFL-CIO blog.

Explainer: A primer on the federal budget processJosh Hicks in The Washington Post.

As Congress debates, Obama tries to figure out where to stand. "Members of both parties say Mr. Obama faces a conundrum with his legislative approach to a deeply polarized Congress. In the past, when he has stayed aloof from legislative action, Republicans and others have accused him of a lack of leadership; when he has gotten involved, they have complained that they could not support any bill so closely identified with Mr. Obama without risking the contempt of conservative voters." Jackie Calmes in The New York Times.

Short films interlude: "Cargo," about the zombie apocalypse.

3) Are gun control's fortunes looking up?

Surprise! Gun legislation's prospects might be improving. "Prospects for a bipartisan deal to expand federal background checks for gun purchases are improving with the emergence of fresh Republican support, according to top Senate aides...[I]n a move that could draw other Republicans as well as Democrats from conservative states who have not yet backed Obama’s agenda, Sen. Joe Manchin III (W.Va.), a key Democratic broker, has spent the past few days crafting the framework of a possible deal with Sen. Patrick J. Toomey (R-Pa.). Manchin and Toomey are developing a measure to require background checks for all gun purchases except sales between close family members and some hunters." Ed O'Keefe and Philip Rucker in The Washington Post.

WH readies public campaign on gun control. "The White House is stepping up its public efforts to shame Republicans into allowing a vote on gun control legislation in the Senate, saying that a threatened filibuster is an affront to the families of the children who died in the December school massacre in Newtown, Conn...Mr. Obama will try to increase the pressure on Monday, when he travels to Connecticut to meet with the families of the school shooting and deliver a speech on the gun legislation." Michael D. Shear in The New York Times.

Images interlude: Hilariously bad "Arab" stock photography

4) The problems with disability insurance

Are would-be workers stuck on disability? "The unexpectedly large number of American workers who piled into the Social Security Administration's disability program during the recession and its aftermath threatens to cost the economy tens of billions a year in lost wages and diminished tax revenues...Michael Feroli, chief U.S. economist for J.P. Morgan estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences." Leslie Scism and Jon Hilsenrath in The Wall Street Journal.

...And the DI fund will be depleted in 2016. "If the trust fund runs out, that doesn’t mean that all benefits payments must stop, just that they won’t be able to remain at the current level...The only way to keep benefits at the current level is either through higher tax rates, or the reallocation of money earmarked for all Social Security programs. This issue actually came up in 1994. Then, as now, income wasn’t keeping pace with outlays. At that time, lawmakers just altered where money from the payroll taxes went, sending more to the disability fund and less to other programs." Phil Izzo in The Wall Street Journal.

Explainer: Key economic data this weekAmrita Jayakumar in The Washington Post.

Housing prices are on a tear. Thank the Fed. "The U.S. housing market has broken out of a deep slump, and prices are shooting up faster than anyone thought possible a year ago. For many homeowners, that is a cause for celebration. But the speed at which prices are rising is prompting murmurs of concern that the Federal Reserve's campaign to reduce interest rates could be giving the housing market a sugar high." Nick Timiraos in The Wall Street Journal.

Watch interlude: Chinese landscape painting animated shorts, from the Shanghai Animation Studio in the 1960s.

5) Obamacare's next hurdles

Enrollment in new health plans to pose massive challenge for Obamacare. "[S]six months before the process begins, questions are mounting about the scope and adequacy of efforts to reach out to consumers – especially in the 33 states that defaulted to the federal government to run their marketplaces, also called exchanges. The Obama administration has said little about outreach plans for those states, and neither the money nor the strategy is apparent." Jenny Gold in Kaiser Health News.

...And other delays in implementation rankle Democrats. "HHS has delayed by one year a provision that would have allowed small businesses in most states to choose from multiple policies for their workers. Although a handful of states will see increased competition next year, most will have just one plan to choose from until 2015. " Sam Baker in The Hill.

About those delays: "As to what this means for the larger health-care law, it seems possible to read it one of two ways. The first you might call the apocalyptic reading, that this is just the first in a long line of delays that will ultimately lead to the Affordable Care Act’s unraveling. The logistical challenges with this issue, cited by Health and Human Services, will quickly become clear in other parts of the law as we edge closer to 2014. But there’s another reading of this, one that suggests the Obama administration has realized it can’t do everything and, in lieu of that, is smartly focusing on the absolutely essential parts of the health-care law, making sure that those do turn out well. HHS is in the middle of building dozens of complex marketplaces that it thought states would be managing, and doing so on an tight timeline." Sarah Kliff in The Washington Post.

Interview: Former FDA official Susan Wood talks with Sarah KliffThe Washington Post.

Some small businesses opt to take penalty. "Small-business owners across the U.S. are bracing for the health-care law that kicks in next year, fearing it will increase the cost of providing insurance to employees...Under the Affordable Care Act, employers with 50 or more full-time workers will be required to provide coverage for employees who work an average of 30 or more hours a week in a given month. An alternative to that mandate is for business owners to pay a $2,000 penalty for each full-time worker over a 30-employee threshold." Emily Maltby and Sarah E. Needleman in The Wall Street Journal.

Reading material interlude: The best sentences Wonkblog read today.

Wonkblog Roundup

Why most politicians survive scandalsDanny Hayes.

At least 28 of Sen. Baucus's former aides are now tax lobbyistsEzra Klein.

How much money do you make? It depends what you countMike Konczal.

Interview: Frmr. FDA official Susan WoodSarah Kliff.

Et Cetera

Want to start the week with a long read? Here, check out this new profile of Calif. Gov. Jerry Brown. Matthew Garrahan in The Financial Times.

Details come out on Intrade -- it's short $700,000 and may liquidateSteven Russolillo in The Wall Street Journal.

It's the libertarian's momentJames Hohmann in Politico.

Got tips, additions, or comments? E-mail me.

Wonkbook is produced with help from Michelle Williams.

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