Sunday, December 21, 2014

Here we go again: Changing COLA to cut Social Security?

Reports say Obama will again propose a supposed "technical fix" to Social Security: Using a "chained consumer price index" that reflects consumers' ability to choose substitutes as prices rise.

Here we go again: Changing COLA to cut Social Security?

President Obama is due to offer a budget compromise next week, and it will reportedly include more means testing for Medicare and use of a "chained Consumer Price Index" to make Social Security cost-of-living adjustments - a flawed idea I've written about here and here.

Complaints about his strategy from the liberal side of the blogosphere were quick and predictable. "Compromiser in Chief" was the headline on the Huffington Post's mobile site for a story by Sam Stein explaining the administration's position.   At Slate, a thoughtful piece by Matthew Yglesias questioned the  wisdom of trying to compromise with a Republican party that makes repeated demands for "entitlement cuts" but that clearly doesn't want to trade anything in revenue - and, as Yglesias puts it, is eager to "run ads castigating Democrats for bankrupting the country so badly that they want to add Social Security cuts to the dastardly Medicare cuts they already implemented."

Don't think that's possible? Dream on, says Washington Monthly blogger Ed Kilgore:

The main data point we have on that possibility is the relentless GOP campaign against “Obama’s Medicare Cuts” in 2010 and 2012. If Paul Ryan—Paul Ryan—can pose as the savior of Medicare, standing bravely between his mother and mean old Barack Obama, then anything’s possible.

As this debate moves forward, it's crucial that Social Security's defenders focus on the misdirection underlying this proposed use of the chained CPI, a legitimate alternative measure of the impact of price increases on consumers that relies on their ability to choose substitutes as prices rise - something the ordinary CPI also does, though to a lesser extent. FactCheck.org, at Penn's Annenberg Public Policy Center, offers a good history of the debate over chaining here

As FactCheck notes, there are good arguments that a chained index is, in general, a more accurate measure of how consumers experience prices increases. But that doesn't mean that switching Social Security and other government COLAs to a chained CPI is a mere "technical fix," as Obama may spin it with help from the Moment of Truth Project, the group led by Erskine Bowles and former Sen. Alan Simpson, former co-chairs of his unsuccessful National Commission on Fiscal Responsibility and Reform. Moment of Truth, one of several anti-debt organizations funded by billionaire Pete Peterson, recently updated its white paper promoting the chained CPI's use.

Economist Dean Baker at the Center for Economic and Policy Research has repeatedly challenged the grounding of the proposal, including in this piece in December when the idea was last floated. A key problem is that neither the ordinary CPI nor the chained alternative takes into account the particular spending patterns of the elderly, who, for example, spend relatively more on health care and housing and less on food and transportation than younger people.

Nor does chaining take into account the fact that elderly consumers are probably less well-equipped than other consumers to shop around or make substitutions, and may be less inclined to do so after a lifetime of habit formation.

A longtime experiment at the Bureau of Labor Statistics has attempted to model a special CPI for the elderly - you can read about it here. It might well be reasonable to finance a more robust version of the "CPI-E," and to use that to adjust Social Security benefits over time.  Perhaps even a chained version - if economists can model elderly consumers' limited ability to make substitutions.

But to just a pick a different index because it saves money - enough to reduce a recipient's benefits by 6 percent after 20 years - is a lousy approach to policy.

As Baker says, America's seniors don't start out living high on the hog:

"The median income of people over age 65 is less than $20,000 a year. Nearly 70 percent of the elderly rely on Social Security benefits for more than half of their income and nearly 40 percent rely on Social Security for more than 90 percent of their income. These benefits average less than $15,000 a year."

The idea of a cost-of-living adjustment is to hold recipients harmless as prices rise. Measuring it  accurately should be the priority - not cutting benefits to meet a political demand.

Jeff Gelles Inquirer Business Columnist
About this blog

Jeff Gelles, who writes the Inquirer's weekly Consumer 14.0 and Tech Life columns, takes a broad look at the marketplace of goods, services, and ideas.

Reach Jeff at jgelles@phillynews.com.

Jeff Gelles Inquirer Business Columnist
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