President Barack Obama created a hullabaloo by including a proposal to index future cost-of-living increases in Social Security benefits to a chained consumer price index rather than the one used over the past 38 years.
Many Democrats are beating him up for his alleged willingness to hurt the poor and helpless. Senior citizens’ lobby groups like the AARP are doing the same. Some Republicans are trying to pin the label of “Social Security cutter” on Obama even though this particular change has been in most of their spending reduction proposals, including sundry variations of Rep. Paul Ryan’s budget plan.
All this to-do outstrips the underlying importance of the proposed change. Moreover, what it actually entails seems poorly understood by most of the media and the public. We are not likely to get good legislation in this environment.
Start with the crux of the dispute: Adopting this change would tie benefit increases to a technically better inflation index for the general population. That pleases economists, but few others. Based on how this chained CPI has moved in the 13 years the Bureau of Labor Statistics has tabulated it, using it would result in beneficiaries getting somewhat smaller increases over time than with the current index.
The degree to which this is true is not certain, however. Critics of the measure come up with cumulative benefit reductions of tens of thousands of dollars by age 85 and base that assumption on the average difference between the current method and the new method from 2000-2013.
But that difference has not been constant. If one takes the average for the past five years rather than all 13, benefits after 20 years would be less than 3 percent lower rather than the 6 percent often computed. This is equal to losing one year’s cost-of-living adjustment out of 20.
Critics of this proposal argue there is a simpler alternative. Raise the limit on earnings to which taxes for Social Security apply from the current $113,700 to $150,000 or $200,000. That would make the program sound for many additional decades or even into perpetuity.
I personally would support an increase in this limit, at least to a level where 90 percent of all earned income in the country would be taxed. This was the historical level and one assumed by the Greenspan Commission when it came up with changes to make the program solvent over the Baby Boomer retirement era. But since so much of increases in national income since then have gone to people earning over that level, these taxes now apply to less than 85 percent of earned income.
However, if you want to go this route, recognize that once again we would opt for a policy that benefits older people to the direct detriment of younger people.
People now in retirement or close to it would have a higher level of consumption and younger people would have a lower level, although those getting hit would still have incomes well above the median. I would benefit, and my children would be hurt, at least if their careers continue to go well.
Another alternative put forth by critics of a CPI switch is means-testing Social Security benefits. As one’s overall income rises past some point, benefits would be cut off or progressively scaled down — so that the likes of Warren Buffett, Bill Gates or Jaime Dimon would not get a monthly deposit.
I also could support this, depending on where the cut-off was set. Recognize, however, that this would be a fundamental departure from the Bismarckian “social insurance” model the program was founded on, in which everyone pays in and everyone gets some benefit. Set the cut-off low enough to save much money and you transform it into another “welfare” program like food stamps or Temporary Aid to Needy Families, critics warn.
All of this sidesteps a more fundamental question that no one wants to address: Why should beneficiaries statutorily get iron-clad protection from any increase in the general price level? No one else does. There was no such guarantee for the first four decades of the program’s existence. Does justice really demand that there be one now?
And, if so, why is it perfect justice to take some benefit level, chosen by an accident of politics 40 years ago, and vary it by any price index, choose which you will, while ignoring what is happening to the levels of living of the rest of the population?
Finally, there is much misunderstanding about the reasons for “chaining” itself. The differences between a chained index and those used historically merit a column of their own. The core issue, however, is how one accounts for changes in consumption patterns over time. Beef gets more expensive relative to chicken so people eat more chicken and less beef, for example. The old index assumes people keep on buying as much beef, a chained one phases in the new pattern.
But not all changes are driven by price. When I was born, folks ate an average of 8 pounds of lamb a year. Now it is 0.7. We ate 21 pounds of chicken then and 84 now. Pasta consumption has increased by a factor of 12. Lard is way down and vegetable oils way up.
Are these changes really due to the impoverishment of the American people?
Would the general CPI be a better index if we gave the same weight to Betamaxes and VHS tapes as we once did? Or to penny loafers and poodle skirts?
Most changes in the items in the “market basket” for any price index, and the weights they are given, are driven by changes in tastes and preferences rather than relative prices. Accounting for these changes on an ongoing basis, which is what a chained CPI does, makes good sense. We should not dismiss it summarily.