Simple "Weekend Economists" October 18-20, 2013

[Demeter]

12. The chained CPI: A zombie benefit cut still walks By Michael Hiltzik

http://www.latimes.com/business/hiltzik/la-fi-mh-chained-20131004,0,4565719.story

It happens every time: Republicans and Democrats get into a standoff over the federal budget, and their best plan for wriggling out of it is to nickel-and-dime people on Social Security and Medicare. The worst zombie in this package, a terrible idea that simply won't die, is the "chained CPI." This is a version of the consumer price index that purportedly yields a more "accurate" reading of inflation, which is supposed to be virtuous because Social Security recipients get a cost-of-living increase every year based on inflation. The chained CPI has risen to walk among us again in the muttering and jawboning around the government shutdown/debt limit standoff and the search for an exit. We're hearing again about a "grand bargain" on the government deficit -- never mind that the deficit is falling, not rising -- that would trade, say, cuts in Social Security and Medicare and some kind of tax reform for an end to the government shutdown and an increase in the debt limit. In other words, the average person gets a kick in the slats, and the politicians in Washington get to deliver it. That's some bargain. A few things to remember about the chained CPI, which I've written about here, here, and here. LINKS AT OP (If you're going to kill a zombie, you have to keep coming at it.)

First, its vaunted accuracy is a myth. An index like the CPI can't be judged more or less accurate, because it measures only what it's defined to measure. Does the market basket measured by the CPI accurately define what people spend money on? Yes, if they spend money on what's in the basket. And we know that retirees don't spend money the same way as young or middle-aged families; they spend disproportionately more on healthcare and housing. The agency that produces the inflation index recognized that elderly consumers are a special case by developing an experimental index, known as the CPI-E, for those 62 and older. What really makes the chained CPI attractive to budget cutters is that it consistently comes in lower than the traditional CPI. For retirees, the gap builds over time; after 30 years, benefits would be 10% lower than under the traditional CPI. The CPI-E, however, rises slightly faster than the traditional index. That's why you never hear pundits praising it for its "accuracy." The chained CPI also involves another nasty shock for average Americans. For the sake of fairness, using it as the Social Security cost of living measure would mean using it for other government calculations indexed to inflation, such as income tax brackets.

What would that mean? Well, according to the Tax Policy Center, it would hit low-income taxpayers especially hard. Someone earning $30,000 to $40,000 would get whacked three times as hard, measured by the tax increase as a share of total income, as someone earning more than $1 million...Social Security advocates have always considered President Obama to be a little squishy when it comes to resisting Republican efforts to cut Social Security and Medicare and hit the middle class with higher taxes. Thus far, Democrats in Congress have held the line. But every crisis brings yet another effort to preserve the prerogatives of the wealthy and take the cost out of middle- and working-class hides. On this occasion, when the costs of the shutdown have fallen on Head Start children, medical patients and middle-class workers, to slice away another portion of their safety net would be a truly unspeakable act.