0

MARCUS: A cost savings everyone should endorse

WASHINGTON -- The cliff talks have disintegrated, victim of the Crazy Caucus also known as the Republican House. But eventually they will resume, and with them discussion of a way to raise billions in tax revenue -- an approach on which House Speaker John Boehner and President Obama agree but that liberals assail as a betrayal of the poor.

This is my cheeky and, admittedly, slightly misleading way to introduce the wonky topic of the "chained" consumer price index. The CPI is used to calculate inflation adjustments in both taxes and government benefits. Astonishingly, switching to a different measure, called chained CPI, is one tax increase that Republicans can swallow.

But the change would also result in smaller benefit checks -- hence the liberal uproar over Obama's supposed treachery in agreeing to it.

Here's how the CPI works. When it comes to taxes, brackets, standard deductions, personal exemptions and the like are ratcheted upward with inflation, protecting taxpayers from being forced to pay higher taxes for what is essentially the same amount of income they had previously.

Benefits -- everything from Social Security to veterans' benefits to federal pensions -- are similarly adjusted upward to protect beneficiaries' buying power from being relentlessly eroded.

Such indexing makes eminent sense. The difficulty -- and the money-saving opportunity -- arises because, in the view of most economists, the current method of calculating changes in the CPI overstates the inflation rate.

It fails to account for what economists call upper-level substitution bias, and what my mother would call plain common sense: If the price rises for a certain commodity in the basket of goods used to measure inflation, consumers will choose a cheaper alternative. In my house, when the price of beef soars, we substitute chicken.

The CPI doesn't and, as a result, taxpayers are undercharged and beneficiaries are overpaid -- a lot. The overestimate is small -- less than 0.3 percentage points annually -- but, much like compound interest, it adds up over time.

Changing the inflation measure to what is called chained CPI would save $225 billion over the next decade.

Of that, $95 billion would come from increased tax revenue, $80 billion from Social Security (assuming built-in protections for the very old and very poor, about which more later) and the rest from other programs. Because of the compounding effect, the savings in following years would be even larger.

If chained CPI is a more accurate inflation measure, benefit checks will be smaller than they otherwise would have been. But the purchasing power of those benefits will remain the same.

So, you might say, that's a mighty big if. Indeed, the elderly may face higher costs, especially for health care, than other Americans, and health care costs are growing more quickly than overall inflation. Some opponents of chained CPI argue instead for switching to what's called CPI-E, a measure that gives more weight to health and housing costs.

The problem is twofold. That measure is imperfect -- the "E" stands for experimental. And, as the liberal Center on Budget and Policy Priorities notes, the burden of higher health costs falls unevenly among the elderly. Average costs are skewed upward by a minority who face very high out-of-pocket expenses, a problem better addressed by fixing Medicare to deal with catastrophic costs.

There remain two reasons to worry about a switch to chained CPI -- the old-old and the poor-poor.

For the very old, who are more likely to have exhausted other sources of income, the compounding effect of the switch will be significant.

For the very poor elderly and disabled who receive Supplemental Security Income (SSI), the impact could be doubly problematic because CPI is used to compute both initial benefits and cost-of-living increases.

As a result, every commission that has examined the issue and endorsed the change has coupled it with additional benefits for the poorest recipients.

Opponents of the switch -- including AARP and, more convincingly, the National Women's Law Center -- insist these protections are inadequate. The administration assures me that, under its approach toward the oldest seniors, the poorest would be shielded and perhaps even better off.

Such concerns are an important reason for care in crafting the details of any change. They are not a reason for refusing to fix an inaccurate inflation measure that overpays beneficiaries and undercharges taxpayers. That is a particularly clumsy, infuriatingly wasteful way of protecting the most vulnerable.

Ruth Marcus' email address is ruthmarcus@washpost.com. Eugene Robinson is on vacation.

Comments

notblind 1 year, 11 months ago

There is no cliff. There is only fiscal responsibility . We have to raise taxes and cut spending. It's coming sooner or later.

0

Jan 1 year, 11 months ago

The CPI is not a reasonable option. Why would anyone want to bleed their elders? We already have seniors on Social Security choosing which of their medicines to not refill so they can buy food because Social Security benefits have been eroding because the the current method of calculating inflation does not account for greater percentage of elderly expenditures in high inflation areas such as medical care. "Upper-level substitution bias" is just a clever way to tell the elderly to lower their standard of living so the top 5% can amass more wealth. Our seniors have paid taxes and are vested in Social Security and should receive the benefits that they were promised.

0

kevin 1 year, 11 months ago

This story is ludicrous. Does this writer really think that seniors are getting too much of an increase 1.5%, every so often? Change the retirement age to 67 if the current calculation disturbs you. Yes, they got a 1.5% gross increase but a 5% increase in Medicare premiums. Can you do that much math to see how much "NET" increase seniors are getting. The present system does NOT contain the items that should be there in the first place, things that seniors buy a lot of. If they were, inflation would show its ugly head in a heartbeat. Maybe it is really about 5%. Quit trying to screw around with their only small paycheck. Stop the ever continuing unemployment checks and maybe things would change. Obama would have to then become a leader and get more jobs for these people to take. But no. For now, why should the unemployed look for work. They make more not working on some cases, considering all the benefits open to them. Yes, we sure live in a nation that Liberals have decided to punish the successful and control the unsuccessful, most of their own doing.

0

Why_not 1 year, 11 months ago

Wake up Kevin....the age for receiving full SS retirement benefits has been 67 for many years....where ya been?

0

kevin 1 year, 11 months ago

Maybe you do not know about SS as well as you think you do.

0

Why_not 1 year, 11 months ago

Kevin, it's obvious I know more about it than you do.

0

kevin 1 year, 11 months ago

We are already over the "cliff" and people do not know it. $15 trillion in debt is no laughing matter. I guess some of these writers here like being in debt. Maybe they are bankers.

0

NewsReader 1 year, 11 months ago

Why_not, I'm going to give you some free unsolicited advice. Kevin is a religious troll from the planet Uranus. He is not a conservative, and while he may claim to be Republican, Republicans don't claim to be him. Kevin speaks because he has to say something, not because he has something to say. Anything he says isn't gonna be much. And the best way to deal with a troll is not to feed it. In other words, ignore his ignorant A$$! I'll save addressing the content of the article for another day.

0

jack 1 year, 11 months ago

Actually, kevin and Why_not seem to have a symbiotic relationship, much like shark and remora. You never see one without the other.

0

Why_not 1 year, 11 months ago

I just find it to be a lot of fun following him around...I am amazed by his intellect...haha

0

kevin 1 year, 11 months ago

expose the Obama voters for the hypocrites they are.

0

kevin 1 year, 11 months ago

http://www.nola.com/politics/index.ssf/2013/01/hurricane_sandy_relief_package.html#incart_river_default

Then try to dispute these Obama lies to try to get his spending bills passed. Obama swore to stop entitlements, another lie.

0

Sign in to comment