At the heart of the potential deal to avert America’s Jan. 1 austerity trigger is an exchange of cuts in social insurance spending for increased tax revenues, the only way to pull recalcitrant House Republicans into the deal. The latest offer on the table accomplishes this by adopting a different measure of inflation, “chained consumer price index,” when calculating benefits and tax brackets. President Obama has supported this change in principal in the past, and while Democrats oppose benefit cuts generally, chained CPI is politically palatable for four reasons.
1. It’s a real benefit cut, not a nominal one. Social Security, America’s public retirement program, indexes its benefits to inflation and performs a cost-of-living adjustment when appropriate. Currently, it uses prices paid by urban workers to determine how much to add. The calculations would be similar with chained CPI, but the difference is the new measure takes into account “replacement effects.” That is, if one thing gets too expensive, like the price of beef is going up because of droughts, people don’t just keep buying expensive beef: They switch to cheaper chicken. Accounting for that kind of behavior means a slower increase in prices, and thus a slower increase in the cost of living. Slowing those benefits increases would save around $125 billion over a decade, without the political pain of cutting benefits directly or raising the access age.
2. It raises taxes, too. Something else is indexed to inflation, and that’s tax brackets. The idea is that making $50,000 today is a lot different than making $50,000 forty years ago, and your tax bill should reflect that. But adopting chained CPI, with slower increase in the cost of living, means that those brackets will grow more slowly, forcing more people to pay higher marginal tax rates. This won’t garner as much deficit reduction as the benefit cuts, and it affects low-income people more than the wealthy, but it could raise some $70 billion over a decade.
3. It’s possible to exempt the particularly needy. The Obama administration’s proposal is fairly similar to an idea described by the Center for Budget and Policy Priorities in February of 2012, exempting older Americans and those receiving disability payments from the new method of calculating the cost of living.
4. It stays away from Medicare, the public health insurance program for America’s seniors. Cutting Social Security spending is probably the lowest priority on the spending reduction totem pole: It’s not going to see the same massive increase in spending forecast for government health programs. It’s economically beneficial and efficient. But getting some savings from the program means less pressure to dramatically restructure Medicare, which the Democrats overhauled two years ago, cutting $716 billion and taking a lot of political heat in the process. Make no mistake: Cuts to Medicare and Medicaid, which pays for health care for the poor, will be on the table, and on the Medicare side, at least, there’s room to save money without cutting benefits. But adopting chained CPI makes it easier for Democrats to push back against Republican demands to raise the Medicare access age by two years.
Bonus Reason 5: The Century Foundation’s Greg Anrig chimes in with one reason I forgot:
Maintaining the program’s existing structure means that these cuts could be more easily reversed in the future, and avoids the dislocation that would come with a privatizing the government program.