Alternative benchmark would close 25% of 75-year shortfall.
It's official — almost. President Barack Obama's new budget proposal calls for reductions in the growth of Social Security and other benefit program, according to several news sources.
Although the administration's proposal for the Fiscal 2014 federal budget that begins October 1 won't be officially released until next week, details were leaked to major news agencies today.
A key feature of the plan, according to Associated Press, calls for using a new measure of inflation to adjust Social Security benefits and other inflation-sensitive parts of the federal budget, such as income tax brackets. The new formula is called the "chained CPI."
Currently, the federal government relies on the consumer price index (CPI) to index provisions of the budget and tax code to account for cost-of-living changes and maintain purchasing power for beneficiaries. There are several variations of the CPI.
The CPI-W, which is based on the typical purchases of a sample of wage and clerical workers — not retirees — is used to adjust Social Security benefits and other federal retirement programs. Economists of varying political stripes agree that the CPI-W overstates inflation because it doesn't account for the fact that when the price of one commodity increases substantially, consumers tend to substitute a less expensive alternative, such as swapping chicken for steak when beef prices rise.
An alternative benchmark
The Bureau of Labor Statistics has developed an alternative measure — the chained CPI — to account for the effects of economic substitution on changes in cost of living. Since 2000, the chained CPI has, on average, been 0.25% to 0.3% lower per year than the standard CPI measure. Though the difference is small, it compounds over time.
Switching to the chained CPI, as recommended in Obama's budget, would close about 25% of Social Security's 75-year shortfall and would be a significant down payment on bringing that program into long-term balance, according the nonprofit New American Foundation's paper “Measuring Up: The Case for the Chained CPI.”
While proponents of the switch to the chained CPI call it a “technical improvement,” the National Academy of Social Insurance (NASI), a longtime protector of national safety net programs, considers it a benefit cut.
NASI notes that existing CPI already undercompensates Social Security beneficiaries because it does not fully reflect their out-of-pocket health care expenses, which tend to be higher than those of younger Americans. “To shift to the chained CPI would appear to undercompensate them even further,” according to the NASI's fact sheet “Should Social Security's Cost-of-Living Adjustment Be Changed?”
Administration officials have said Obama would only agree to the reductions in benefit programs if they are accompanied by increases in revenue. That's a long shot given the strong anti-tax sentiment of House Republicans.
So this is just a proposal and the opening salvo is what will probably be another protracted budget debate in Washington. I'll be keeping a close eye on the deliberations.
Although most proposed changes to Social Security benefits in inevitable reform discussions — such as increasing the normal retirement age — would affect future beneficiaries, a change in the way benefits are indexed to inflation would affect everyone — including current retirees.
