The President's Proposed Chained CPI Protections

Much of the early debate surrounding President Obama’s FY 2014 budget concerns his inclusion of the chained Consumer Price Index (C-CPI), a more accurate measure of inflation that could produce some $390 billion in savings, according to the CBO. By OMB's estimate, President Obama's version of the chained CPI switch would save $230 billion over ten years, $130 billion from spending and $100 billion from revenue (note that the bulk of the difference is due to a one-year delay in implementation). We've covered this provision frequently on The Bottom Line and have also produced a helpful one-pager and resource page on the topic.

One common criticism of this proposed change is that adopting the chained CPI would have a disproportionately large impact on low-income and vulnerable populations. As we have shown before, switching to the chained CPI is not regressive, but roughly distributionally neutral, both on the tax side and within Social Security. However, distributional neutrality does not mean that there is not a legitimate concern about the effect of the chained CPI on low-income individuals and the very old. Fortunately, the Administration has an answer to these concerns.

Along with its chained CPI proposal, the President has proposed a package of protections for the disadvantaged and the very elderly. Specially, the President would exempt all means-tested programs from the chained CPI switch and offer a Social Security benefit enhancement for the very old.

The enhancement would equal 5 percent of the average retiree benefit phased in over 10 years starting at age 76 (or 15 years after disability insurance eligibility), with a second bump up at age 95. According to the White House, these changes together would actually reduce poverty among the very old. This policy is quite promising, and similar to a bump up proposed by the Fiscal Commission. As we've argued before, "there is little reason to provide higher than warranted increases in benefits for all Social Security beneficiaries just to protect lower-income beneficiaries when those concerns could be addressed by much more targeted policies and at lower overall costs." We evaluated a slightly different bump-up previously, one that phases in later, and found that it makes the chained CPI switch progressive overall.

^{Source: Social Security Administration, CRFB calculations}

The Administration’s proposal to exempt certain programs from the switch to the chained CPI is less promising. The chained CPI is a more accurate measure of inflation, period. Applying it to only some areas of the budget is not only wrong policy but could undermine the rationale for switching to the chained CPI. Instead, lawmakers could use a portion of the savings that the switch produces to provide new benefit enhancements for low-income individuals. For example, the Center on Budget and Policy Priorities has suggested expanding the old-age bump up to other programs like Supplemental Security Income and indexing various provisions like the SSI income disregard and asset limits to inflation. Policymakers could further look at enhancements to food stamps or other low-income programs.

But the most important low-income protection is to get our fiscal house in order and make Social Security sustainably solvent. Absent reform, all beneficiaries regardless of income and age face a one-quarter benefit cut immediately in 2033. Switching to the chained CPI won't make Social Security solvent on its own, but it is a move in the right direction.

The President should be commended for including the chained CPI in his budget. Clearly, one key aspect of its part in a budget agreement is how the chained CPI protects the most vulnerable and the very elderly. The President's budget, the Simpson-Bowles framework, and the CBPP provide a few ways to do it.