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The Social Security Benefit Cut in the Debt Limit Talks

One of the more insidious possibilities in a debt limit deal is the use of something called “chained CPI,” which would result in changes to how the government calculates the annual cost of living adjustment. This would impact both how tax brackets change on an annual basis, and also how the COLA gets applied in federal programs, particularly Social Security. And it would save quite a bit of money, around $300 billion over 10 years if applied to the whole of government. Congressional aides have confirmed that this is on the table in any deal.

Let’s look at reductions in the growth of Social Security benefits, for example. The Congressional Budget Office estimates a reduction in benefits from the baseline by $108 billion over 10 years. According to Social Security’s chief actuary, beneficiaries who retire at age 65 and receive the average benefit would get roughly $500 less in their annual benefit at age 75, and $1,000 less at age 85. The benefit cut compounds over time, as the COLA adjustment reduces every year. As this would take effect immediately, it also represents a benefit cut for current retirees.

Using the term “chained CPI” makes this sound like some obscure change, but you can demystify it pretty easily. Every year, Social Security and other plans have a cost of living adjustment that alters their benefits based on prices. The current way that’s calculated, known as the CPI-W (the Consumer Price Index for wage earners) actually doesn’t capture the true cost of living for Social Security beneficiaries, argued a series of experts on a conference call put on by Social Security Works. In particular, it doesn’t take into account the large increases in the cost of health care, which fall particularly on the elderly and people on disability, the core beneficiaries of Social Security.

So you have a few options in that case. You could use the CPI-E, which does a better job of capturing real costs, or you could create a real Consumer Price Index specifically targeted to people who collect Social Security, weighting their average expenses accordingly, and raise benefits based on that. Or, you can use this chained CPI, which does an even worse job than the current COLA calculator of accounting for these costs, and apply it to Social Security, mainly to save money. As Josh Bivens of the Economic Policy Institute said on the call, “There’s this impression put out that this is just a technocratic fix that would impact senior citizens very much. I disagree on both counts.” Bivens and EPI put out a longer paper explaining their opposition to chained CPI.

If you think that Social Security beneficiaries have been reaping a windfall because of an inaccurate COLA every year, then chained CPI is the answer for you. If you think that Social Security benefits are already inadequate, then chained CPI takes this in the exact wrong direction. Heck, even Andrew Biggs of the American Enterprise Institute thinks that chained CPI is “wrong” for calculating Social Security benefits.

And the prime victims of this change would be poor people, who use more of their Social Security check as their sole source of income, and women. The National Women’s Law Center has a study showing that women, by virtue of their longer life expectancy and their greater reliance on Social Security, would bear more of a burden from a benefit cut of this type.

The above two briefing papers have all the technical information you would need to talk about this. But the main point is clear. This is a benefit cut. And it comes at a time when the older unemployed face extreme hardships. So people aged 55-64 may be struggling at the end of their careers, using up their savings, and then when they at least reach Social Security, they’ll get hit with a benefit cut.

The use of chained CPI would also increase taxes by having the brackets increase more slowly. This again is somewhat regressive because we don’t really have high-end tax brackets. But overall, this is a technocratic way to achieve benefit cuts to the people who need them the most.

…In addition, this breaks the promise that Social Security changes would be included in a deficit deal, a promise made by the President and other Democratic leaders.

UPDATE: AARP, from June 22:

It is important to remember that Social Security is currently the principal source of income for nearly two-thirds of older American households receiving benefits, and roughly one third of them depend on Social Security benefits for nearly all of their income. In addition, over the last two years, Social Security beneficiaries have not seen any increase in their monthly checks, even as they have faced rising costs in health care and other basic necessities. As the chained CPI would result in a lower cost-of-living adjustment (COLA) each year, reducing the COLA even by a small amount is a harmful cut for many retirees.

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David Dayen

David Dayen