CQ Researcher | July 18, 2013
Should we measure inflation as accurately as possible? Of course we should, particularly when the fiscal implications of measuring inaccurately are so large. The so-called chained Consumer Price Index (CPI), a far more accurate inflation index than the one used now, would better reflect retirees’ actual spending patterns and the cost increases they encounter. Economists from the left, right and center broadly agree on that, and their view is affirmed by the nonpartisan Congressional Budget Office (CBO) and the Bureau of Labor Statistics. Adopting this improved measure would also generate more tax revenue, slow government spending growth and strengthen the Social Security system.
So how can anyone oppose this change? Some special interest groups do so for their own financial benefit, while others argue that seniors face faster price growth or the most vulnerable would be hurt by this change.
Yet alternative measures that purport to show seniors spending more are highly flawed — including in the ways they measure housing and health care — to the point that the CBO has concluded, “It is unclear...whether the cost of living actually grows at a faster rate for the elderly than for younger people.”
Even if a better measure were produced for measuring cost increases affecting only retirees, adopting it would raise serious fairness concerns. Should the one-third of Social Security beneficiaries who are not retirees receive smaller cost-of-living adjustments so seniors can receive larger ones? Should New Yorkers, with their high cost of living, receive a higher percentage than Detroiters? Should each government program get its own index or only those backed by powerful interest groups?
As for the most vulnerable, it makes little sense to measure inflation incorrectly for everyone in order to retain a desired windfall for the neediest. Doing so would cut taxes for the top 1 percent by $1,000 each in order to keep an average $20 tax cut for the lowest fifth. Instead, desired tax relief and benefit enhancements for the most vulnerable should be achieved through targeted reforms designed specifically to strengthen those populations.
Ultimately, the best thing we can do for the most vulnerable in society — at least within Social Security — is to make the program sustainable and solvent and avoid the 23 percent across-the-board benefit cut currently scheduled for when the program’s funds dry up. If we can’t even measure inflation correctly, how can we hope to make the hard choices necessary to keep Social Security funded for future generations?
The Hill | June 4, 2014
The latest Social Security Trustees report, released last week, shows a program in peril. Within three years, the Social Security disability trust fund will run out of money, at which point the program will only be able to pay 80 percent of benefits to disabled workers. Assuming policymakers decide to allow the disability fund to take money from the old-age fund, the whole program will become insolvent in 2033.
The good news from the trustees report is that the program is in no worse shape than last year. But that should be of little comfort to anyone on the program two decades from now, who will face an immediate 23 percent benefit cut regardless of age or income.
Fortunately, this tremendously unfair and indiscriminate cut can be avoided. And if we act today, it can be averted through a number of modest and gradual changes that mostly slow and speed growth and give workers plenty of time to plan.
There is no shortage of policy ideas to fix Social Security, and as far as government programs go, Social Security is a relatively simple one. Most of the goals of reform can be met by adjusting a few levers — the initial benefit formula, the retirement age, the cost-of-living adjustment, the payroll tax rate and the maximum income subject to the payroll tax.
Indeed, with an online program called The Reformer: An Interactive Tool to Fix Social Security, anyone with a computer and an Internet connection can design his or her own reform. The tool lets users identify the tax and benefit changes they like in order to make the system sustainably solvent for the next 75 years and beyond.
Want to close the shortfall mainly on the spending side? Start by slowing benefit growth for the top 70 percent of beneficiaries and indexing the retirement age to growing life expectancy. Those two changes alone will get you three-quarters of the way toward solvency.
Want to close the shortfall mainly on the revenue side? You can close that same three-quarters of the gap by increasing the payroll tax from 12.4 to 13.5 percent and raising the maximum amount of income subject to the payroll tax from $114,000 to roughly twice that (though this plan would do far less in the 75th year).
Reforms ranging from measuring inflation more accurately to altering disability benefits to applying the payroll tax more broadly can close the remaining gap and even leave room to enhance benefits for some populations.
As a matter of policy, reforming Social Security just isn’t that hard. And changes can be made in ways that encourage work, exempt current retirees from benefit reductions, protect or enhance benefits for the most vulnerable and keep future benefits at least as generous as today’s for almost everyone else.
Unfortunately, politics has gotten in the way, and politics could be the program’s undoing. Benefit changes as sensible as measuring inflation more accurately have become an anathema to the AARP and to many on the left. And revenue changes as modest as gradually increasing the percentage of wages taxed to the levels seen in the mid-1980s are opposed by Grover Norquist and many on the right.
As a result, inaction may be good politics today, but it is incredibly myopic.
While both sides may prefer to wait until they are in a position to enact a solution on their own terms, the choices necessary to close the shortfall will be much more painful for both sides if we wait. As the baby boomers retire and benefits continue to grow, policymakers will soon lose the ability to phase changes in gradually and allow benefits continue to grow for new beneficiaries in real terms. And not too many years in the future, it will become impossible to exempt current retirees from changes or avoid broad benefit changes that affect even the lowest income beneficiaries.
At the same time, waiting will lead to larger and more broad-based tax increases as fewer generations will be able to share in the burden and benefit change simply won’t be able to phase in fast enough.
In the end, waiting to act will lead to unfair and unnecessarily abrupt changes that would rob today’s workers of the ability to plan and adjust.
Luckily, we have an opportunity to fix Social Security now — the easy way — if both parties are willing to come together and negotiate in good faith. But time is running out.
The Hill | May 9, 2013
Over the last few days, politically driven critics have called on the president to abandon his support for changing the way the government indexes provisions in the budget to inflation by switching to “chained CPI.” Looking beyond politics, we’re here to say that these critics’ arguments are wrong on their merits.
As economists from opposite ends of the political spectrum, we would strongly urge the president and leaders in Congress to continue to support moving to chained CPI, which represents the most accurate available measure of inflation and cost-of-living increases. Switching to this more accurate measure of inflation represents the right technical, fiscal and retirement policy — and policymakers should not delay any further in making this improvement.
From a technical sense, the current CPI — or consumer price index — that is used to index many parts of the budget and tax code is widely understood to overstate inflation. This is because it fails to account for so-called “substitution bias,” in which consumers reallocate their purchases depending on the relative prices of similar goods. For example, if the price of apples goes up, consumers will buy more oranges. However, this behavior is not accounted for in standard CPI measurements.
The Bureau of Labor Statistics, which calculates the CPI, is very aware of this shortcoming, which is why it has developed and refined the chained CPI for more than a decade. The nonpartisan Congressional Budget Office states that the chained CPI “provides an unbiased estimate of changes in the cost of living from one month to the next.”
Some argue that using the chained CPI to index Social Security benefits is inappropriate because it does not reflect inflation for retirees, which critics suggest is higher than it is for working-age adults because of the elderly’s higher rate of spending on healthcare. However, the CBO has said that based on the available research, it is unclear whether the cost of living actually grows at a faster rate for the elderly than for younger people, and that the CPI-E —“E” for “experimental” — which was intended to provide a more accurate measure of inflation for seniors, has several methodological flaws that overstate inflation, including underestimating the rate of improvement in healthcare.
Beyond the technical case for the chained CPI, there is a strong fiscal case. Because current measures currently overstate inflation by about 0.25 percent per year, moving to a more accurate measure would result in real deficit reduction. Measuring inflation more accurately would generate savings from throughout government: about $390 billion in the first decade alone. Roughly one-third of those savings would come from slower growth in Social Security benefits, another third from revenue increases (as certain tax provisions such as the cutoff points of income tax brackets are indexed to inflation) and the remaining savings from a combination of other spending programs and lower interest payments on the debt. Given the very real need to begin to put our debt on a sustainable path, this would be a small but important contribution. The savings would be gradual, with only a small amount in the near term, thus protecting our fragile recovery from immediate austerity.
Finally, switching to chained CPI is the right retirement policy — or rather, a small piece of it. The Social Security program is on a path to exhaust its trust fund. Current projections indicate that this will occur in 2033, threatening cuts for all beneficiaries, including the very rich and the very poor, the very young and the very old, veterans, disabled workers and others. Improving the way we measure inflation won’t prevent the program’s looming insolvency, but it will eliminate a full fifth of the long-term funding gap.
To the extent that the overpayments under the current formula offset the shortcomings of our current retirement system for the lowest-income and most-elderly beneficiaries, a switch to chained CPI can and should be accompanied by targeted policy changes providing benefit enhancements designed to help the affected populations, rather than providing higher-than-justified inflation adjustments for all beneficiaries.
The federal government should not knowingly continue to measure inflation inaccurately, especially given the costs to the budget and to the Social Security program. Changes that cut Social Security benefits are a tough sell for Democrats, and changes that increase revenue are a tough sell for Republicans. But if they cannot even agree to a technical correction to those areas of the budget, how will they be able to make the hard choices to control our debt and reform our government over the long term?
The Hill | April 30, 2013
In his recent blog entry on chained CPI (Chained CPI: Unfair and inaccurate, April 26th), AARP President Robert Romasco highlights his groups opposition to the change, charging that it would be “Unfair and Inaaccurate.” In fact, nothing could be further from the truth.
A coalition of strange bedfellows, including Grover Norquist’s Americans for Tax Reform and Moveon.org, have announced their opposition to this policy, even as many responsible policymakers from both sides of the aisle and at the highest levels of government continue to support it – notably, the president and the Speaker of the House.
It is no surprise that groups from the left and right have mobilized to defend the status quo in order to avoid the tough choices that must accompany any responsible deficit reduction plan. Yet, the resistance to a reform as simple and obvious as using the most accurate measure of inflation for price-indexed provisions in the budget is both astounding and disappointing.
Economists from the left, right, and center are in broad agreement that chained CPI more accurately reflects cost-of-living increases by accounting for the small-sample and substitution biases in the current inflation measure. This view is shared by experts at the non-partisan Congressional Budget Office as well as the experts at Bureau of Labor Statistics who are responsible for measuring inflation. Adopting the chained CPI doesn’t represent a policy change, but rather would best reflect the current intent of the law to index various provisions to inflation.
And while some argue that seniors face faster cost-growth than other populations, there is little evidence of a significant difference when one accounts for the fact that seniors are more likely to own their own homes mortgage free, have different shopping habits than younger populations, are able to take advantage of senior discounts, and receive constantly improving health treatments. Indeed, according to the Congressional Budget Office, “it is unclear, however, whether the cost of living actually grows at a faster rate for the elderly than for younger people.”
Moreover, offering seniors a preferential inflation measure raises more fairness concerns than it answers. If seniors receive a higher inflation measure, should non-seniors on the Social Security program receive a lower measure? Geographic inflation disparities are far larger than alleged age disparities (inflation has averaged 2.7 percent in New York and 1.8 percent in Detroit over the last decade); why protect seniors and not New Yorkers? What about other government programs and tax provisions? Should each be indexed to costs within its population? Or only those backed by powerful interest groups?
Indeed, it would be highly unfair to politicize inflation indexing or to exempt any government program or tax provision from the most accurate available measure of inflation.
More unfair would be ignoring our fiscal and retirement challenges and leaving the job to a future politicians. According to the left-leaning Center on Budget and Policy Priorities, the President’s chained CPI proposal would result in benefit levels 1 to 2 percentage points lower than under current law – and it accompanies the switch with benefit enhancements for the old that actually reduce poverty among that group. By comparison, there is a 25 percent cut scheduled to occur under current law when the trust funds dry up in 2033. The greatest unfairness would be allowing this across-the-board benefit cut to hit every beneficiary regardless of age or income – when this cut could be easily avoided through a balanced package of revenue and benefit adjustments.
Mr. Romasco is right, we need a national conversation on improving retirement security, including how to make Social Security sustainably solvent in order to avoid abrupt benefit cuts and ensure the system is better protecting those who rely on it. Ideally, we’d have this conversation now. However, the overheated reaction to a technical correction in cost of living adjustments suggests that the political system may not be ready to tackle comprehensive Social Security reform. Continuing to index benefits improperly while we wait for this reform to materialize would be a costly mistake that will only make future Social Security changes more painful.