Monday, April 22, 2013

More on the Chained CPI (April 18 House Ways and Means Subcommittee Hearing)

On April 18, the Subcommittee on Social Security of the House Ways and Means Committee held a hearing on the proposal to use the chained CPI-U to index Social Security payments. This index increases at a somewhat slower pace than the CPI-W, the index to which payments are currently indexed. 
The hearing was stacked in favor of the change. There were two proponents of the change, Charles Blahous and Ed Lorenzen; two government witnesses – Jeffrey Kling (Assistant Director for Economic Analysis, Congressional Budget Office) and Erica Groshen (Commissioner of the Bureau of Labor Statistics – who, while assuming a neutral stance, clearly believe that the chained CPI-U is a better index to measure the change in the “cost of living”; and one witness, Nancy Altman, who opposed the change and any other changes to Social Security at this time.

Reading the prepared statements is dispiriting. This is a political fight that some pretend to be all about a technical fix. To the proponents of the chained CPI-U, the argument is that it is a better index, this is a technical fix, and using it helps shore up Social Security finances. Charles Blahous couches his recommendation by saying that the chained CPI should be used for all government programs if Congress is persuaded that it is a better index, though it is fairly clear that Mr. Blahous believes that Congress should be persuaded of that. He also says that if the chained CPI-U is adopted, there should be no exceptions. He does not mention that the Administration in its budget proposes that the chained CPI-U not be used for means-tested government programs. Also, he, like most everyone else, ignores the inflation indexation of some Treasury securities. For reasons mentioned in my previous post on this subject, it is not legal to use chained CPI-U for outstanding inflation-indexed securities and not practical to use it for forthcoming issues of these securities.

The proponents also brush aside the long delay (years, not months) in getting final numbers for the chained CPI-U. They just point out that CBO has come up with some ways to use initial numbers. This is still, though, a real problem, and would likely become more so in higher inflationary environments than we are currently experiencing.
For her part, Ms. Altman argues that using the chained CPI-U is a benefit cut which hits the most vulnerable and that it is a worse, not better, index for measuring the cost of living for seniors.  On the latter point, she points out that the CPI-E, the experimental inflation index for those 62 and over, generally shows more inflation than the CPI-W. Therefore, moving to an index that increases more slowly than the CPI-W is even less accurate.

The real disagreement between Ms. Altman, on one side, and Mr. Blahous and Mr. Lorenzen on the other, is on whether we need to cut Social Security benefits. Blahous and Lorenzen use graphs from the Social Security trustees to show that the Social Security trust funds will be running out of money. Lorenzen says using the chained CPI-U is an easy fix; Blahous argues that there is an urgent need for real reform of Social Security and he does not consider adopting the chained CPI-U reform of the system. Altman uses data from the Social Security trustees projecting that Social Security benefits will reach 6.1 percent of GDP and stay there in the future, a percentage she says we can easily afford.
The fight over the chained CPI is an opening skirmish in more fights about Social Security cuts.  The outcome of this opening skirmish on a highly technical subject will not be decided objectively, but politically. It is interesting, though, that Andrew Biggs, a former principal Deputy Commissioner of the Social Security Administration and currently a resident scholar at AEI, a conservative think tank, has recently written in opposition to the chained CPI:

“It's hard to see how chained CPI can be a win for conservatives. With congressional Democrats opposed, the narrative is already forming that President Obama only proposed using the chained CPI to appease congressional Republicans. But why should Republicans take the rap for a measure that weakens Social Security for the least well-off and institutes a large and regressive tax increase? Higher taxes and a less effective Social Security program - what's not to dislike?”

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