Fact Checking the Harkin Resolution

This week, Senator Tom Harkin (D-IA) introduced a concurring resolution that would establish a sense of Congress that chained CPI should not be used to index cost-of-living adjustments or provisions in the tax code. The Campaign to Fix the Debt responded, saying:

Reaching agreement on a comprehensive debt deal will require consideration of all options and compromises by both sides, and taking proposals off the table makes a deal harder. Chained CPI is a technical change that would help improve the budget situation and strengthen Social Security, and it has the support of President Obama as well as experts across the country. It is irresponsible and counterproductive to take a common sense and bipartisan option off the table.

As we've talked about many times on the blog, there are many merits to switching to the chained CPI, a more accurate measure of inflation. We have also written a paper discussing in full the technical and budgetary merits of the measure. Below, we walk through the entire legislative language and fact check some myths and misperceptions:

"Whereas the Social Security program was established more than 77 years before the date of agreement to this resolution and has provided economic security to generations of Americans through benefits earned based on contributions made over the lifetime of the worker;"

This is true.

"Whereas the Social Security program continues to provide modest benefits, averaging approximately $1,156 per month, to more than 57,000,000 individuals, including 37,000,000 retired workers in March 2013;"

True, although the initial benefit for someone retiring at age 65 this year is $1,493 per month. That will increase to $1,581 by 2020 and $1,804 by 2035 in real terms (2012 dollars). In nominal terms, monthly benefits would be $1,905 and $3,292, respectively.

"Whereas the Social Security program has no borrowing authority, has accumulated assets of $2,700,000,000,000, and, therefore, does not contribute to the Federal budget deficit;"

This is only one way of looking at the program, where the program has dedicated funding and its own trust fund. But this approach also assumes that lawmakers would allow benefits to be cut if funds were exhausted. Another view is that Social Security is part of the federal budget, and outlays in excess of revenue would contribute to the deficit.

"Whereas the Board of Trustees of the Federal Old-Age and Survivors Insurance Trust Fund projects that the Trust Fund can pay full benefits through 2032;"

True, but the Trust Fund will run out in 2033 and beneficiaries will face a 25 percent benefit cut.

"Whereas the Social Security program is designed to ensure that benefits keep pace with inflation through cost-of-living adjustments (referred to in this preamble as ‘‘COLAs’’) that are based upon the measured changes in prices of goods and services purchased by consumers that is currently published by the Bureau of Labor Statistics as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI–W);

Whereas the Bureau of Labor Statistics publishes a supplemental measure of inflation, the Chained Consumer Price Index for all Urban Consumers (C–CPI–U), or ‘‘Chained CPI’’, which adjusts for projected changes in consumer behavior resulting from price fluctuations known as the ‘‘substitution effect’’;

Whereas the substitution effect occurs when consumers buy more goods and services with prices that are rising slower than average and fewer goods and services with prices that are rising faster than average;"

True, the incorporation of substitution effect is the primary reason why the chained CPI would be a more accurate measure of inflation.

Whereas studies indicate that typical Social Security beneficiaries spend a significantly higher percentage of their budget than other consumers on health care, health care prices have increased at higher than average rates, and consumers, including seniors, may not be able to substitute health care easily;

While it is true that seniors spend more on health care, there is no evidence they have different substitution habits overall, and there is little evidence they experience higher inflation. As the CBO explains "It is unclear, however, whether the cost of living actually grows at a faster rate for the elderly than for younger people, despite the fact that changes in health care prices play a disproportionate role in their cost of living."

Whereas the current COLAs, based on the CPI-W, fail to reflect that Social Security beneficiaries spend more of their income proportionally on expenses such as health care as compared to a regular wage earner, and therefore underestimate increases in the cost of living of Social Security beneficiaries;

This is uncertain. In a recent CBO analysis of the CPI-E, CBO pointed out that many analysts believed that the Bureau of Labor Statistics (BLS) may underestimate the improvement in quality of care and therefore overstated the price increase of health care. Even putting that point aside, setting the precedent of having population-specific price indices for programs is problematic, especially since many Social Security beneficiaries are not elderly and variations by criteria such as geography are much larger than those by age.

Whereas reductions in Social Security benefits from using the Chained CPI to calculate Social Security COLAs would continue to compound over time, and the AARP Public Policy Institute estimates that the reductions would grow to 3 percent after 10 years and 8.5 percent after 30 years;

Whereas Social Security Works estimates that using the Chained CPI to calculate Social Security COLAs would reduce annual Social Security benefits of the average earner by $658 at age 75, $1,147 at age 85, and $1,622 at age 95;

Actually, according to an analysis by the Center on Budget and Policy Priorities, the President’s chained CPI proposal would only change current law benefits by an average of 1 to 2 percent. And as we show, benefits for an 85 year old 20 years from now will actually be 25 percent higher than current law allows and 8 percent higher in real terms than today’s 85 year olds. We write more about this here.

Whereas reductions in Social Security benefits would harm some of the most vulnerable populations in the United States;

Using the wrong measure of inflation represents an expensive and poorly-targeted way to offer relief to the most vulnerable. Both the President’s budget and "A Bipartisan Path Forward" instead propose targeted benefit enhancements. The White House proposal was found to reduce projected poverty for elderly seniors.

Whereas adopting the Chained CPI would cause tax brackets and the standard deduction to rise more slowly, disproportionately raising the tax burden on low- and middle-income taxpayers;

"Disproportionately" is a stretch. Analysis from the Tax Policy Center has shown that the chained CPI would be a roughly distributionally neutral tax change, including a very small change for the very poorest. Even so, any undesired revenue increase for low- or middle-income taxpayers could be dealt with in the context of comprehensive reform. For example, the Simpson-Bowles illustrative tax plan included both the chained CPI and a gas tax increase and still cut taxes slightly for the bottom quintile.

Whereas the Department of Veterans Affairs provides more than 3,200,000 veterans with disability compensation benefits as a result of injuries or illnesses sustained during, or as a result of, military service;

Whereas Social Security Works estimates that using the Chained CPI to calculate veterans disability COLAs would reduce benefits for 100 percent-disabled veterans who started receiving benefits at age 30 by $1,425 at age 45, $2,341 at age 55, and $3,231 at age 65; and

Whereas adopting the Chained CPI would also cut the benefits of more than 350,000 surviving spouses and children who have lost a loved one in battle by cutting Dependency Indemnity Compensation benefits that average less than $17,000 per year:

Benefits would grow more slowly than scheduled, but at the more accurately measured rate of inflation, which reflects the intent of cost-of-living adjustments in these programs. If benefits are considered to be too low for certain populations after switching to the new index, adjustments could be made to compensate, rather than continuing to use an inaccurate measure of inflation for indexing purposes.

Click here to read some common myths about the chained CPI.