Ed Lorenzen Testimony Before the House Ways and Means Committee's Subcommittee on Social Security: Chained CPI
Los Angeles Times | April 2, 2013
In his March 22 blog post criticizing proposals to switch from the consumer price index to "chained CPI" to determine cost-of-living adjustments for Social Security beneficiaries and other items in the federal budget, Michael Hiltzik claimed that there were "no grounds" for the statement made in a recent paper from the Moment of Truth Project ("Measuring Up, The Case for Chained CPI") that the chained CPI provides a more accurate measure of inflation than the measure currently used.
In fact, experts across the ideological spectrum agree that the chained CPI is indeed more accurate. In his 2005 book "The Plot Against Social Security," Hiltzik listed various proposals for reforming Social Security, among them chained CPI. He wrote, "Many economists maintain that CPI consistently overstates inflation ... because it doesn't account for so-called substitution effects." Hiltzik doesn't explicitly endorse the proposal, but this is certainly a far cry from his objection that there are "no grounds" for the claim that chained CPI is a more accurate measure of inflation.
Advocates for using chained CPI to more accurately index government programs to inflation include Austan Goolsbee, who served as chairman of the president's Council of Economic Advisors under President Obama, and Michael Boskin, who held the same position under the President George H.W. Bush. Their view is shared by the overwhelming majority of economists. A report by the nonpartisan Congressional Budget Office stated that the chained CPI "provides an unbiased estimate of changes in the cost of living from one month to the next." Two of the most respected and prominent defenders of Social Security, the late Sen. Daniel Patrick Moynihan (D-N.Y.) and the late Robert Ball, the longest-serving Social Security commissioner, who founded the National Academy of Social Insurance, both supported the use of chained CPI to more accurately achieve the goal of providing inflation protection for seniors and disabled beneficiaries.
The Bureau of Labor Statistics has noted the shortcomings of the current inflation indexing and specifically designed the chained CPI to be a closer approximation to a cost-of-living index. The bureau has developed and refined the chained CPI over more than a decade.
The government indexes benefit programs such as Social Security as well as provisions in the tax code to ensure they keep pace with inflation. Using a more accurate measure of inflation is not a benefit cut, but rather ensures that the benefits increase by the proper amount to achieve the desired policy goal. This change does not single out Social Security, as Hiltzik implies, but would apply to provisions throughout the federal budget. Social Security accounts for slightly more than one-third of the $390 billion in total savings over the next decade that would result from switching to chained CPI, with a similar amount of savings from revenue and the remainder from other government programs indexed to inflation along with interest savings.
To the extent that the overpayments under the current formula provide important help to certain low-income and elderly individuals, a switch to the 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 everyone. Every significant bipartisan deficit reduction effort, including the Simpson-Bowles plan, the Domenici-Rivlin plan and the negotiations between Obama and House Speaker John Boehner (R-Ohio) has proposed using chained CPI to index spending programs and the tax code, with a portion of the savings used to provide enhancements for low-income, elderly and other vulnerable populations.
Addressing our fiscal challenges will require many tough choices and policy changes, but the chained CPI represents neither. Eliminating the unjustified increases in spending and reductions in revenue that have resulted from using an inaccurate measure of inflation should be at the top of the list for any deficit reduction plan.
This report was originally published 05/11/2011 and has been updated on 12/12/2012 and again on 3/19/2013.
The Government We Deserve | January 23, 2013
“We must act, knowing that our work will be imperfect,” Barack Obama proclaimed in his second inaugural address. Interestingly, the Washington Post blazoned its front page with the first three words without noting the succeeding dependent clause. Yet within this clause, I believe, lies the means by which the president—and Congress—and we—can move past so many of our conflicts and face up to the problems that confront us. The solution lies not in acting, but in recognizing the imperfection of what we do. If our budgets are to be vehicles for change, then we cannot enact so many laws as if the priorities of one time and place must endure forever.
More than ever before, our recent fights carry with them the implication that victory must be complete and total, setting in stone the institutions that will rule over our successors for decades and centuries to come. “We must act,” each political party seems to say, “as if our work will be perfect, else our opponents may someday slow down or even reverse our course.” Permanent monuments must be made to some liberal or conservative agenda, regardless of whether that monument rests upon unstable ground, employs an architecture glued together from incongruous designs, or fails to leave room for the improvements that only future knowledge may reveal.
Today, if we favor Social Security, it must be maintained permanently in its ancient design. For all generations of ever-expanding life expectancies, we must allow beneficiaries to retire as early as 65, or, when feeling temporarily richer, at 62. We must even accept its 1940s stereotype of the two-parent family, with abandoned mothers required to pay taxes to support spousal benefits for which they are ineligible. Similarly, if we favor less government, we can’t just work toward that goal by reducing spending. No, we have to create permanent tax cuts even if that means running economically disastrous deficits.
If we favor helping the poor, then we can never give up support for benefits like SNAP or food stamps. These programs must be etched in the law as superior to any alternative use of those funds, including ones that might provide better opportunities to people in need. If we subsidize an industry, whether oil or alternative fuel or agriculture or manufacturing, then we must enshrine that subsidy in the tax code.
Now, of course, there’s good reason for using legislation to try to provide some certainty or security. With perfect foreknowledge, we can plan for the future. But what if that future remains uncertain? Planning for it then requires creating a way to respond to its surprises, good and bad.
Unfortunately, we’ve gone long past the point where our federal budget could be flexible. A fiscal democracy index I developed with Tim Roeper shows that the combination of entitlement growth and low revenues means that today most revenues are already committed to permanent spending programs. Almost every congressional decision to adjust national priorities has to be paid for out of a deficit, or by overturning some past “permanent” enactment.
Earlier, before entitlements became so prevalent and dominant, spending was largely discretionary. Congress also felt that we should pay our bills on time, so it didn’t finance tax cuts for today’s generations by passing those liabilities onto future generations. Though many programs survived for decades, most still had to receive new votes of support. Even more important, almost none had any built-in growth. That made it easy to let some ideas languish as others came into prominence, leaving room for new choices or reconsideration over time.
Compromise is much easier when one side or the other isn’t forced into reneging on past promises to the public. It’s easier when it’s possible down the road to proceed on the same course, pursue the same objective via a different course, or decide on both a new objective and course. It’s easier when we’re not asking our opponents to keep funding some permanent monument we want erected to ourselves.
“But we have always understood that when times change, so must we; that fidelity to our founding principles requires new responses to new challenges…We understand that outworn programs are inadequate to the needs of our time…Let us answer the call of history, and carry into an uncertain future that precious light of freedom.” (Barack Obama, January 21, 2013; emphasis mine).
The Hill | May 1, 2012
Since the Social Security Trustees report was released last week, we’ve heard a lot about the year 2033. That’s the year when the Social Security trust funds as a whole will run out of money and will no longer be allowed to pay full benefits. The real year to pay attention to, though, is 2016, when the Social Security Disability Insurance fund runs out of money.
What does this mean? It means that within half a decade, during the next presidential term, the disability program will no longer have the legal resources to fully pay its 12 million beneficiaries. At that point, current law calls for an immediate 20 percent benefit reduction for all disabled individuals.
Most observers don’t worry much about this year. They assume that when 2016 comes around, politicians will simply reallocate money from the old age program into the Social Security program and viola, problem solved. I wouldn’t be so sure that transferring the money will be so easy – and I’m not sure it should be.
The Social Security disability system is broken in many ways. Not only is the program financial insolvent, but the system is wrought with fraud, needlessly complex, difficult to navigate, inconsistent and unfair in determining eligibility, inflexible to changes in the structure of the workforce, administratively overburdened, almost completely uncoordinated with other government policies, and unable to help or reward those who are interested in reentering the workforce.
Making the disability system solvent simply by taking money from the already-underfunded old-age system would represent a double policy failure by committing a disservice to both programs. Instead, policymakers should use the fast-approaching insolvency date in the same way they did when the trust funds ran low in 1983 – come together and fix both programs for this generation and the next.
Specifically, any plan which reallocates money from the old age program to the disability program should do the following:
Enact reforms to improve Disability Insurance over the short-term
When lawmakers worked to prevent the Social Security trust funds from running out of money in 1983, the primary focus was on identifying the $150 to $200 billion necessary to keep the program solvent through 1989. Similarly, they should work to identify savings approaching $200 to $300 billion through 2022 in order to keep the DI trust fund intact.
On the spending side, savings could come from enhanced anti-fraud efforts, reductions in duplicative benefits, limits to retroactive benefits, and changes to the way we treat beneficiaries who collect disability as an alternative to reduced early retirement benefits. On the tax side, one option would be to gradually increase or remove the “taxable maximum” on the 1.8% disability payroll tax in order to ask high earners to contribute more without dramatically increasing their marginal tax rates.
Take steps toward more structural reform
At the same time we identify short-term savings, we should be asking more fundamental questions about the program. How should disability be defined? How can we offer different types of support across various state and federal programs? Is there room for partial disability in the system? How can we help to train and reward beneficiaries to go back to work, or to avoid entering the disability system in the first place?
We need a disability system for the 21st century, a system which answers these and many more questions. Such a fundamental rethinking to the 55-year old program will take time, but we can more aggressively pilot new ideas starting today, and combine that with a study and review process to make bolder reform possible in the coming years.
Fix Social Security: Make it sustainable solvent
The 1983 reforms focused on the short term, but used the opportunity to enact long-term changes as well. The combined Social Security program is incredibly underfunded over the long-run -- by one to one and a half percent of GDP depending on how one measures it. We can eliminate this gap through a comprehensive plan which slows benefit growth for higher earners, gradually increases the retirement age, and makes other tax and spending changes to make the old-age and disability programs sustainable over the long run.
Undertaking such reforms today would give workers plenty of time to plan and make changes, and offer them the security of knowing the program will be there for them and the next generation.
Ideally, we wouldn’t need a looming insolvency to force action on this important issue. But if politicians need the threat of a crisis in order to act responsibly, there is no shortage of these in the months and years ahead. Hopefully they will act in time to avoid them.