Chained CPI Makes Senses (Update: Maybe Not)
UPDATE: Well, I may partially backtrack on this one quick. I stand by my goal of using an accurate estimator of inflation. I wrote this post assuming that chained CPI is our most accurate estimator for inflation. And it is, except not for seniors. Timothy Noah makes a convincing argument:
For the elderly, spending patterns are unique in one very significant respect: Old people spend a lot more on health care. Yes, they have Medicare. But they also have a lot more trips to the doctor. As a result, the older-65 set spend a much larger portion of their incomes on health-related expenses than the rest of the population. And health inflation, you may have heard, is increasing quite a bit faster than inflation for other goods.
The BLS is aware of that, and has crafted a special CPI just for old people. And guess what? The so-called CPI-E is not only rising faster than the chained CPI; it’s also rising faster than the CPI-W that’s used to calculate benefit increases today. So if a “technical” correction were all that was called for in calculating Social Security, that correction would have to increase benefits, not reduce them.
Well then, maybe benefits have been underestimated for years. I’m going to research more on this, but right now it seems like CPI-E is the way to go for Social Security benefits and chained CPI for taxes, though I don’t think Republicans are going to like the idea of increased benefits and increased taxes very much.
As journalists across Washington continue to put forth ideas about what could be a part of a fiscal cliff* deal. One possibility that has repeatedly come up is adjusting the way Social Security benefits increase each year to account for inflation. Right now, benefits increase according to CPI-W, but conservatives want to alter the formula by using chained CPI. Dylan Matthews explains the difference between the two better than I can:
Most inflation measures, including CPI-U and CPI-W, track the price of a certain basket of goods. That basket could include, say, a year’s supply of propane. When propane costs go up, CPI-U and CPI-W include that as an increase in the cost of living.
But some people would just stop using propane if its price went up. They’d switch to electric heating, or a geothermal system, or a wood stove. So their actual heating costs wouldn’t go up as much as CPI-U and CPI-W would suggest. Chained CPI attempts to take “substitution effects” like this into account. Thus, its number generally rises more slowly than other metrics.
Thus, chained CPI is an entitlement cut. My take on this has always been that using an accurate estimator of inflation is the ultimate goal. Yes, this would cut benefits and would disproportionately affect seniors who live longer. But, a more accurate way of saying it is that benefits have been growing faster than inflation for decades and seniors that have lived longer have reaped the benefits. This should be something we are looking to correct.
The Center for Budget and Policy Priorities agrees and has endorsed switching to chained CPI, but with a couple of caveats:
1. It wants to switch to chained CPI for both benefits and taxes. Agreed.
2. The CBPP wants “a modest benefit increase (or “bump”) for long-time Social Security beneficiaries.” I can’t get on board with this one. I understand that switching to chained CPI hurts those long-term beneficiaries. But it also just eliminates the extra benefits they have been receiving for years. If we want to increase Social Security benefits for those who live longer or are most vulnerable, that’s a topic for another conversation.
3. The CBPP also wants to “exempt the Supplemental Security Income (SSI) program from the switch or make other changes to SSI to mitigate the chained CPI’s impact.” I’m more neutral on this one. SSI helps the poorest seniors in the country and even a tiny benefit cut will hit them hard. Exempting SSI would not cost the government very much money, but would be important for a number of seniors.
At the same time, SSI benefits have been increasing faster than the rate of inflation due to the use of CPI-W. So I’m sympathetic to the view that we should tie it to the correct measure of inflation. In the end, I’d side with protecting our most vulnerable seniors, but wouldn’t be at all annoyed if SSI wasn’t exempted.
4. Finally, the Center wants to ensure that the “proposal…specifically identify the programs to be moved to the chained CPI to avoid confusion or unintended effects.” Absolutely.
Yes, it’s technically an entitlement cut, but that’s an unfair way to frame the issue. The fact of the matter is that Social Security benefits have been too high for a number of years. Switching to chained CPI corrects that and that makes economic sense.
*Nota bene: I agree with both Ryan Cooper and Kevin Drum here. Liberals should be calling it something other than the “fiscal cliff,” but there really isn’t any other option and it’s too hard to personally choose a different phrase and explain it each time.