If adopted across the government, the new inflation measure would have widespread ramifications. Future increases in veterans' benefits and pensions for federal workers and military personnel would be smaller. And over time, fewer people would qualify for Medicaid, Head Start, food stamps, school lunch programs and home heating assistance.
Taxes would go up by $60 billion over the next decade because annual adjustments to 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 be smaller.
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Despite fierce opposition from seniors groups, the proposal is gaining momentum in part because it would let policymakers gradually cut benefits and increase taxes in a way that might not be readily apparent to most Americans. Changes at first would be small — the Social Security increase would be cut by just a few dollars 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 proposal to use a different Consumer Price Index has been floated for years. It was most recently proposed by the Obama administration during deficit reduction talks in the summer. Now, it is one of the few options supported by both Democratic and Republican members of a joint supercommittee in Congress working to reduce government borrowing.
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 proposal to adopt a new Consumer Price Index was floated by the Obama administration during deficit reduction talks in the summer. Now, it is one of the few options supported by both Democratic and Republican members of a joint supercommittee in Congress working to reduce government borrowing.
The committee of six Democrats and six Republicans is working on a plan to reduce government red ink by at least $1.2 trillion during the next decade. Changing the inflation index alone would put them a sixth of the way there.
“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.
The inflation measure under consideration is called the Chained Consumer Price Index, or chained CPI. On average, the measure shows a lower level of inflation than the more widely used CPI for All Urban Consumers.
Many economists argue that the chained CPI is more accurate because it assumes that as prices increase, consumers 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. Or, as opponents mockingly argue, if the price of home heating oil goes up, people will turn down their heat and wear more sweaters.
A report by the Moment of Truth Project, a group formed to promote the deficit-reduction package produced by President Barack Obama’s deficit commission late last year, supports a new inflation measure. “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,” it argues.
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. Next year’s increase, the first since 2009, will be 3.6 percent, starting in January.
Under the chained 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.
“For someone in the first year, it may not seem a lot,” said AARP’s David Certner. “But as people get older and then they get poorer and more reliant on Social Security, the cut gradually gets larger and larger.”
In all, adopting the chained CPI would reduce Social Security benefits by $112 billion during the next decade.
Federal civilian and military pensions would be $24 billion lower, according to the nonpartisan Congressional Budget Office.
All about: United States, Social Security, Consumer Price index, Social Security Administration
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