The Social Security Cut Washington Does Not Want You to Understand

Politicians often rely on a complacent press to enact a draconian agenda. Right now, the mainstream media are failing in their duty to inform Americans about the chained CPI, (Consumer Price Index), a cut to Social Security’s COLA (cost-of-living adjustment) that is likely to be considered by the bipartisan special committee charged with producing a $1.5 trillion deficit reduction package six months from now. This is unfortunate, because while the arguments for its adoption are dubious, the damage the chained CPI would inflict on seniors and disabled persons would be very real.

The chained CPI is a more modest measure of inflation. It increases 0.3 percent less on average than the CPI-W (Consumer Price Index for Urban Wage Workers and Clerical Workers), which is currently used to determine Social Security’s COLA. The COLA is an annual increase in Social Security benefits that beneficiaries receive at the end of the year to ensure that those benefits do not lose value due to inflation. There is not a COLA every year; it is only provided when the CPI registers inflation. In fact, because of the recession, there was not a COLA for the past two years.

The chained CPI is seen as an attractive change in the current bipartisan deficit talks in Washington, because when applied government-wide, it both cuts spending and increases taxes. In addition to Social Security, when applied to several other programs that provide COLAs, such as Veterans Affairs benefits, federal employee pensions and other program’s whose benefits are based on inflation (such as Supplemental Security Income), the chained CPI would dramatically reduce government spending. When applied to the tax code, it would slow the rate at which tax brackets and refundable deductions like the Earned Income Tax Credit (EITC) increase, thereby increasing revenue.

And the new CPI would work its magic through a technical change that both Democrats and Republicans can spin as not selling out their principles. In total, two-thirds–$145 billion–of the $217 billion in savings from the chained CPI would come from benefit cuts, and one-third–$72 billion–of the savings would come from revenue increases, according to CBO. From Social Security alone, the chained CPI would save $112 billion from benefit cuts–more than half of all savings from the measure.

Those Social Security cuts would save money, but they would also devastate seniors and disabled persons who depend on the program. The Strengthen Social Security Campaign, a coalition of over 300 national and state groups united in opposition to cuts in Social Security benefits for which I work, has run the numbers – and they are not pretty. The average Social Security benefit is modest, averaging just $13,000 a year. While a 0.3 percent reduction in the index used to calculate Social Security’s annual cost-of-living adjustment (COLA) may not seem big, it compounds over time, cutting benefits more with every passing year. That also means it hits Social Security beneficiaries hardest in late old-age when they are likely to have run through their savings.

For the average earner, the chained CPI would cut benefits by $560 at age 75 (a 3.7% cut), $980 at age 85 (6.5% cut), and $1,392 at age 95 (9.2% cut).

And the worst part is, unlike other proposed entitlement cuts, these cuts would hit current Social Security beneficiaries too.

The chained CPI’s proponents claim it is more accurate because it accounts for “higher-level price substitution,” which is a fancy way of saying that consumers trade down to cheaper products that serve the same purpose when prices go up. If beef goes up by 5 percent, our consumption of chicken goes up commensurately. The cost of living goes up more slowly as people substitute prices, and therefore, the thinking is, so should our measure of inflation.

But the logic of “higher-level price substitution” does not exactly hold up in the case of the elderly and disabled populations who spend a much larger share of their incomes on healthcare costs. “They buy fewer iPods and more medicines,” as Rep. Barney Frank (D, Mass.), memorably put it. And medicines, or surgical procedures, are impossible to “substitute” with cheaper versions. As Rep. Peter DeFazio (D, Ore.) quipped in a speech last week, “If you need bypass surgery, you can’t just opt for a hernia.”

By all accounts, the chained CPI was part of the $4 trillion deal that House Speaker John Boehner nearly agreed to back in the first week of July. That deal may be dead, but the chained CPI is far from it. The president gave it his imprimatur when he embraced the Gang of Six plan, which included the chained CPI in its proposed $500 billion in immediate savings.

If the chained CPI does become law, it will be due in part to media coverage that has allowed claims that the chained CPI is “more accurate” to go unchallenged. This claim gives politicians the sacred Beltway cover of seeking “good policy,” despite the political unpopularity. With rare exception, the only experts quoted in Beltway publications and talk shows have been budget hawks–often sponsored by Peter G. Peterson, the billionaire private equity investor who has devoted millions to evangelizing a particular center-right brand of deficit hysteria – explaining that the chained CPI is a mere “technical change,” that makes inflation more accurate, with no countervailing opinions. Here’s a typical new story, from Bloomberg News, in which no fewer than four experts or lawmakers lauding the chained CPI’s accuracy, and not one saying otherwise:

“There hasn’t been any economist anywhere that says we shouldn’t do that,” said Senator Tom Coburn…

Advocates say switching index measures would be a technical change, not a tax increase.

“I don’t see how anybody can argue against having accurate formulas,” said Senator Mike Crapo, an Idaho Republican who was a member of the Gang of Six…

There is a “pretty widely held” consensus among economists that the bureau’s methodology exaggerates inflation because it doesn’t fully account for how individuals respond to rising prices, said Mark Zandi, chief economist of Moody’s Analytics…

“It’s a no-brainer,” said Marc Goldwein, former associate director of the administration’s deficit commission. “We’re measuring inflation wrong now and it’s obvious we should measure it right – especially if it’s going to reduce the deficit.”

For a different take on the chained CPI’s accuracy, all the reporters needed to do was interview someone from the Strengthen Social Security Campaign, the Economic Policy Institute, the National Women’s Law Center or the Center for Economic Policy and Research. But they did not.

While it may be too late, the chained CPI has mobilized the opposition of a wide array of groups. To its credit, the AARP, which caused a stir in June when it came out in favor of Social Security benefit cuts, has publicly opposed the chained CPI, and even bought ads attacking the deficit talks.

For now though, the chained CPI’s best hope may be the far right-wing of the Republican party, which opposes it on the grounds that it is a tax increase. As Grover Norquist, President of Americans for Tax Reform said, “This is one of those things invented by people who are trying to raise taxes and pretend they’re not. If you change the law to get more money, that’s a tax increase – doesn’t matter how you do it or what you call it.”

I never thought I’d be saying this, but, Godspeed, Grover. Godspeed.

This article was updated to incorporate details of the debt deal announced by President Obama on Sunday July 31.