Debating the Chained CPI

Yesterday, I posted a piece that questioned the political and policy wisdom of President Obama’s latest offer for a budget deal. My qualms were vindicated when Speaker Boehner, rather than taking the widely leaked “progress” as a new common ground, went back to his starting point and offered his own “Plan B”. This left President Obama in just the position that he vowed that he’d be in again—“negotiating against himself.”

In the piece, I also criticized the role of my friend Bob Greenstein in lending credence to backdoor cuts in Social Security. Bob is the much revered and tireless advocate for the poor who is the longtime president of the Center on Budget and Policy Priorities. My piece questioned both his political logic in assuming that Social Security cuts have any place in this budget deal and his assumption that including them will somehow protect programs for the poor. My piece mistakenly described the annual cut as 3 percent rather than 0.3 percent, but it accurately pointed out that over time the cuts would total more than $10,000 in Social Security benefits. That’s a total, cumulative benefit cut of 5 to 6 percent. The piece stimulated an all-day argument among people who follow Social Security and budget issues.

Below is Bob Greenstein’s response, which was posted on his blog. My reply to his comment follows his.

 

Robert Greenstein’s response:

The President’s decision to include, in his latest “fiscal cliff” offer to House Speaker John Boehner, a proposal to use the “chained Consumer Price Index” in calculating both annual cost-of-living adjustments in Social Security and other benefits and annual inflation adjustments to various features of the tax code (such as the incomes at which tax brackets begin and end) is eliciting dismay among many progressives.

At CBPP, we have long been open to such a change if, and only if, the tax savings are devoted entirely to deficit reduction (not to financing other tax cuts) and the benefit change includes protections for poor and very old beneficiaries. The details on the Administration’s proposal are not yet available and, until they are, we’re withholding judgment on it.

But, my old friend Bob Kuttner attacked us yesterday on The American Prospect’s website for our openness to the chained CPI. Bob’s piece merits some response.

First, Bob portrays the chained CPI as a massive Social Security benefit cut. “On average,” he writes, “the cut is about 3 percent a year.”

But, the average cut isn’t 3 percent per year. It’s three-tenths of 1 percentage point per year (0.3 percent), according to the Social Security actuaries, or one-tenth what Kuttner assumed. And according to the Congressional Budget Office, the average reduction would be a bit smaller than that—0.25 percent per year.

To be sure, the benefit loss would cumulate over time; after 20 years, it would represent a benefit cut of about 5 to 6 percent. But, the proposal also appears to include a benefit increase after about 20 years that’s equal to 5 percent of the average Social Security benefit, returning the benefit level at that point to close what it would be under current law. (It would begin to slowly erode again after that.)

In short, this proposal would affect beneficiaries. But the benefit reduction is much smaller than Kuttner portrays it.

That leads me to my main disappointment with Bob’s piece. The bulk of it purports to describe my thinking and motivation for being open to what he considers a horrific proposal. Alas, Bob invents some of what he writes out of whole cloth. He never talked to me about why I end up where I do on this issue, and he gets much of my thinking wrong.

Let’s quickly dismiss a Kuttner canard. He lays out a series of reasons why he assumes I’ve adopted this view and suggests that one could be to strengthen my access to the Obama White House. That makes no sense. I have been writing about the chained CPI along the same lines since 2004, when Barack Obama was still serving in the Illinois state legislature.

So what is my thinking? I share concerns about the effects of the chained CPI on beneficiaries. But I think that some benefit cuts in Social Security are inevitable sooner or later. The program needs some changes to make it solvent for the long term, and the chances that policymakers will restore solvency entirely through tax increases—with no benefit-reduction component—are essentially zero. That didn’t happen in 1983, and it almost certainly won’t happen now or in the foreseeable future.

Furthermore, as in 1983, benefit changes won’t be limited to high-income beneficiaries. There are limits to how far one can cut benefits at the top without breaking Social Security’s link between payroll-tax contributions and benefits, and thereby risking undermining public support for the program. I see these factors as basic political realities, whether we like them or not.

That brings me to the key point: the chained CPI is the only Social Security benefit change that brings an increase in general tax revenues with it. Eventually, about half of the savings from the chained CPI come from revenues, and about half from Social Security and other benefit programs. The more that we raise in revenues, the less that policymakers will slash programs generally. So, this—and the fact that the chained CPI is a more accurate measure of inflation (although not necessarily for the elderly)—leads me to conclude that if policymakers can build appropriate protections into the chained CPI to protect both the oldest and the poorest beneficiaries, it’s worth considering.

Finally, I hope people reading Bob’s article don’t think I’m the sole liberal who’s open to the chained CPI. The late, revered Bob Ball—the former Commissioner of Social Security who led efforts to defend the program for half a century and was a hero and beacon on social insurance issues to so many of us—put forth several Social Security plans that included the chained CPI as a way to help restore Social Security solvency. Indeed, I first looked at the proposal after I saw that Bob Ball had included it in one of his plans. The Center for American Progress also embraced the chained CPI several years ago and included the proposal in its Social Security solvency plan.

 

My reply:

There are really several different issues here. First, I apologize to Bob and our readers for the typo of omitting the decimal point on the annual cut. My piece was accurate on the cumulative cut. Bob Greenstein says there is some offsetting increase, but ow details have been spelled out and for now, it is speculative.

The second issue is whether benefit cuts are “inevitable” as Bob contends. I don’t think they are, if liberals make a fight over that. What’s truly unfortunate about Bob’s role in this debate is that advocates of cuts can point to the endorsement of cuts by a prominent and respected liberal like Bob Greenstein. His statement becomes something of a self-fulfilling prophesy. If even distinguished defenders of social insurance like Greenstein say cuts are inevitable, then the debate is only about the details.

The third issue is whether the chained CPI is an accurate or sensible or fair adjustment in the cost-of-living formula as it affects the elderly. There is good evidence that the existing CPI is already inadequate, not excessive, in representing how increases in the cost of living affect the elderly. Health care is increasing much faster than other expenses and the elderly spend more of their income on medical care and drugs than working-age Americans. The real CPI for the elderly is higher, not lower.

Older Americans have also been hit hard on the income side of the equation. Very low interest rates translate into very low earnings on savings. And corporations have been raiding pensions. The old strategy of selling your house when you hit age 70, moving to a smaller place, and living off the income from the sale, has been blown away. Housing values are down 30 percent from their peak, and the income on savings has been reduced to a pittance. So, if anything, the elderly deserve adjustments upward, not downward.

Other think tanks, including the Center on Economic and Policy Priorities and the Economic Policy Institute, have challenged the premise that a shift to the chained CPI would be fair to seniors.

Readers should sift the evidence and draw their own conclusions.

This brings me to the fourth issue—whether Social Security belongs in this budget deal at all. Remember, the budget deal is about cutting the deficit. But Social Security is in surplus. It doesn’t contribute to the deficit. The only reason Republicans and Democratic deficit hawks toss Social Security into the pot is that they have a long-standing crusade to cut it, and because there’s a lot of money there. Given the right’s characterization of the deficit, throwing them a bone in the form of disguised cuts in Social Security via changing the CPI will not keep them at bay; it will only whet their appetite.

Finally, Bob takes issue with my characterization of his role and operating style. It was probably an error on my part to include a discussion of Bob’s role as a key political player in a piece that was mainly about the substance of the budget deal. Some read it as impugning his integrity, which was not my intent and which diverted attention from an important substantive discussion. I apologize for that. Bob complains that I did not discuss this with him before writing the piece, but I did try to reach him all day on a breaking story and finally did get an email response from Bob late at night, which I included in the piece that I posted Tuesday morning.

The role of respected liberals who are relative fiscal conservatives in this whole debate is worth its own piece. My view is that Bob’s posture and role lends credence to the deficit-reduction campaign and ends up cutting programs that he is eager to preserve. His view, articulated in his comment above and elsewhere, is that he is using his best judgment in a fiscal context that gives the right a lot of leverage to cut back social spending, and making the best possible politically realistic defense.

Reasonable people can differ about that. I hope we can continue this debate, live.

My appreciation of Bob’s role over the years as an advocate for the poor is undiminished. I just think he is wrong, tactically and substantively, in the present budget battle.

Comments

I've been gratefully reading every word I can that you've written on this particular story, the budget issue as a whole, and this administration's policies overall. I wish the president would.

Your reply to Greenstein is well stated. Last night I read his response to your previous piece and was struck by two aspects of his argument:

1. The overriding need for deficit reduction is taken as a given. But it is my understanding that the current budget deficit is the only thing keeping the economy from being even worse than it already is right now. We've been living with the propaganda emphasizing the platonic good of balanced budgets and deficit reduction for so long that, other than a precious few of you, even liberals, and certainly not elected officials, dare challenge it. Some progressives are now pointing out that budget-balance is being used as a misleading way to cut popular social programs. But this has been a big part of the right wing economic paradigm we've been oppressed by since the late '70s, which brings me to my second point...

2. Greenstein's comparison of the current political moment to 1983 is telling. We've been operating under the rules of the neoliberal economic paradigm since about 1980. The good news is that this paradigm is now toast. The current ecomomic crisis is not just a business cycle recession but a structural crisis requiring a new paradigm to take its place, more severe than the structural crisis of the 1970's, less severe (hopefully) than that of the 1930's. Because we are still in the early years of this crisis, those in power continue to operate under neoliberal assumptions. Those who've been suffering under and/or critiquing the policies of tha last generation should know better. With respect to this issue and many others, rather than replicating past norms of the neoliberal era, we should be recalling those of the post-WWII era (the golden age of capitalism) or, better yet, aspiring to new standards of a forthcoming era. One of the few saving graces of a crisis this severe is that we can and should now dispense with many of our previous restrictions and dare to acheive new goals previously ruled out.

Your points about Social Security not even belonging in the budget negotiations are of course more directly on point. But I wanted to also make an attempt to place arguments like Greenstein's, which we shall have to endure many more of on many more economic issues, in a broader context.

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