McManus: Can Obama sell ‘chained CPI’?
President Obama won’t release his proposed budget for 2014 until Wednesday, but liberals and AARP have been howling all week about something they expect to be in it.
What has our president done to provoke such outrage among his supporters?
He’s chained CPI.
In an attempt to meet Republicans halfway in the battle over taxes and spending, Obama has offered to change the formula for calculating Social Security’s annual cost-of-living increase — an “entitlement reform” GOP leaders have long asked for.
The result would not change current Social Security benefits, but it would reduce future raises by an estimated three-tenths of 1% in the first year, or about $42 for the average beneficiary. Over the long run, thanks to the magic of compounding, a lower rate of increase would have a substantial effect. After 20 years, estimating very roughly, a retiree might be looking at a yearly payout more than $1,000 less than he or she would have received without the change.
To progressives like Sen. Bernie Sanders (I-Vt.), that’s an unconscionable cut. But others, including former House Speaker Nancy Pelosi (D-San Francisco), are willing to back Obama on this one. “Let’s take a look at it,” Pelosi said recently.
If you’ve read this far, you’re ready for the technical explanation, which requires some background.
When Congress enacted Social Security in 1935, there was no provision for increases. Until 1950, benefits didn’t rise at all, but since 1975, annual cost-of-living adjustments have been automatic, based on the consumer price index.
The problem is there’s more than one way of calculating the consumer price index. Right now, Social Security increases are based on the Bureau of Labor Standards’ CPI-W, for urban workers. But the agency also calculates the index in other ways, including one known as C-CPI-U, or “chained CPI.”
The old-fashioned CPI is based on a fixed “market basket” of commodities. When their prices rise, the index rises proportionally. Chained CPI adds in something called the “substitution effect”: When prices go up, people change what they put in the basket. When the cost of beef increases, for example, consumers switch from steak to chicken, which means their cost of living doesn’t rise as fast as the old-fashioned CPI would suggest.
As a result of the calculation differences, chained CPI rises a little more slowly than regular CPI — by about one-quarter of a percentage point less per year over the last 10 years, according to Robert Greenstein at the Center on Budget and Policy Priorities.
Many economists say chained CPI is a more accurate way to measure the cost of living for retirees and therefore it should be the basis for Social Security adjustments.
Greenstein, the patriarch of liberal budget experts, doesn’t agree. In fact, in a paper he issued on Tuesday, he argued that chained CPI is probably less accurate as a measure of inflation’s impact on the elderly and the poor. Older people spend more on healthcare than on chained CPI measures, he noted. And poor people — who gave up steak long ago — can’t substitute cheaper goods as easily as the middle class.
And yet Greenstein, like Pelosi, has decided that Obama’s proposal for chained CPI is worth a try. The reason, he said, is that if you’re looking for entitlement cuts as part of a grand bargain on the budget, it’s better than the alternatives.
The question now: Will Republicans buy in?
Last year, when the issue first came up, GOP leaders in Congress said chained CPI was an important test of whether Obama was serious about making cuts in Medicare and Social Security and suggested that such a move might make them more willing to compromise on revenue increases.
But last week, when White House officials leaked the news that chained CPI would be in the new budget, Republicans seemed unimpressed.
House Speaker John A. Boehner (R-Ohio) dismissed the proposal as insignificant — and certainly not enough to deserve a GOP concession on taxes in return.
Obama is hoping the plan will get a better reception from the GOP senators he’s been having dinner with over the last two months. They, not Boehner, are the Republicans he hopes to make his partners in a grand bargain.
Even if GOP leaders buy in, the public will take some convincing. A Pew Research Center poll last month found that 55% of Americans think preserving Social Security and Medicare benefits is more important than cutting the deficit, including 73% of Democrats. (A slim majority of Republicans, 52%, believe cutting the deficit is more important.)
If the public doesn’t want the change, and some people in his own party are also opposed, why is Obama moving forward? For one thing, he isn’t running for office again. Proposing a change in the formula for Social Security increases is the kind of thing a second-term president can do.
More important, the proposal is evidence that Obama, despite his failures in 2011 and 2012, still yearns for a grand bargain on the budget. And now that he isn’t running for reelection, he’s willing to take risks, endure complaints from his own party and buck public opinion to try to get it.
Follow Doyle McManus on Twitter @DoyleMcManus
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