Retirement

The latest plan to 'fix' Social Security has plenty of critics

April 30, 2013 at 7:42 AM ET

President Barack Obama speaks about his budget proposal at the White House earlier this month.
Jim Lo Scalzo / EPA
President Barack Obama speaks about his budget proposal at the White House earlier this month.

There’s not much that the left and right can agree on these days, but many on both sides appear to have found a common foe in the latest plan to address Social Security costs.

The proposal, unveiled as part of President Barack Obama’s latest budget plan, would change the method the government uses to calculate inflation to something called the “chained Consumer Price Index.”

The chained CPI assumes that when prices go up for one item, like beef, people don’t always simply spend more. Instead, they sometimes switch to a similar but lower-priced item, like chicken.

Critics on both sides say the proposal would essentially amount to a benefits reduction for Social Security recipients, because it would result in smaller cost-of-living increases for them.

“In effect, you’d have a substantial cut to the program,” said Dean Baker, co-director of the Center for Economic and Policy Research.

The left-leaning think tank estimates that the average worker retiring at age 65 would see a $650 a year cut by age 75. Those cuts would only increase as retirees got older and the gap between the new inflation measure and the old one grew wider.

(The president's proposal does include a benefits enhancement for people 76 and older and those who have been on Social Security for a long time, which could partly offset the switch.)

Baker and others also argue that the chained CPI is a bad idea because it’s a poor measure of how older people really spend money. That’s because retirees tend to spend more on items like health care.

Baker notes that an experimental consumer price index for the elderly, which the Bureau of Labor Statistics has been compiling for some time, indicates a slightly higher rate of inflation for older Americans.

There are plenty of critics on the conservative side too. Andrew Biggs, a resident scholar with the right-leaning American Enterprise Institute, said one concern is that it hits current retirees the hardest, while not doing enough to address the long-term solvency of the retirement safety net.

“I would just think people should aim higher than this,” Biggs said.

The proposed inflation calculation change would also apply to tax rates, which could result in tax increases for some over time. That’s another reason conservatives oppose the plan to more broadly use the chained CPI for government inflation estimates.

“It’s a sneaky revenue raise and it’s a sneaky benefit cut,” said Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research who has studied retirement issues extensively.

The fact that both conservatives and liberals oppose the change caught some people off guard because Obama has painted the proposal as an effort to compromise with Republicans. The proposal to switch to the chained CPI appeared to have support from both Obama and House Speaker John Boehner when it was first under discussion during the fiscal cliff negotiations late last year.

The widespread opposition also is surprising because the switch has historically been seen as one of the least contentious elements of any major plan to reform Social Security, said Richard Kaplan, a law professor at the University of Illinois who specializes in elder law.

“This has always been on the menu and in fact it’s usually been considered the least controversial item on the menu,” Kaplan said. “If you don’t like this, you’re not going to like anything on the rest of the menu.”

Most economists agree that the government will eventually have to make some changes to Social Security, because of government estimates showing that the benefits program for older Americans could see funding shortfalls beginning in about two decades.

Any major reform would involve making big, hard decisions about major elements of the Social Security system, such as the age at which people receive benefits and the rate at which earnings are taxed for Social Security purposes.

Ghilarducci, the economist at The New School, said she thinks another reason the chained CPI proposal hasn’t garnered much support is because it is a small step that does little to address those bigger issues.

“It’s more important that we actually construct a package in a more deliberative fashion,” she said.

Related: Yes, we can fix Social Security (but it won't be pretty)

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