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Chained CPI Not Only a Social Security Benefit Cut, but a Regressive Tax Increase

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Talking Points Memo reported that Barney Frank received assurances from Minority Leader Nancy Pelosi, after her meeting with the President, that “chained CPI,” the change in the COLA that would result in a benefit cut to Social Security over time, “will not happen.” Pelosi herself was more circumspect in a press briefing:


Pelosi punted when asked whether a move from the Consumer Price Index to a “chained CPI,” which is thought to gauge inflation at a slower rate, is, in fact, a Social Security benefit cut.

“There’s concern in my caucus about what would happen with the CPI. Some think it is a benefit cut, others do not,” she said, calling the prospect of moving to a method that could reduce annual cost-of-living adjustments “hypothetical at the present time.”

Well, let’s clear up any ambiguity: it’s a benefit cut. If they point out some nonsense that it’s only a technocratic fix designed to better represent inflation over time, just pull out this chart:

This is only a prevention of “de facto Social Security benefit increases” if you somehow think that Social Security recipients are fat cats who have had it too good for too long. In reality, it’s a benefit cut. More on that here.

But why is this on the table at all? Sure, you can wring $100 billion in savings out of Social Security this way, but that does nothing for you for the budget deficit, to which Social Security hasn’t contributed a nickel. So why switch to chained CPI?

It’s in Jason Furman’s quote here:

“The Consumer Price Indices currently used for indexation employ an outdated procedure that overstate inflation,” said Jason Furman, now the Deputy Director of the National Economic Council, in 2007 expert testimony before the Senate Budget Committee. “If all federal programs and taxes were switched to [Chained CPI] by the end of a decade the government would save more than $40 billion, with the bulk of the savings divided roughly equally between preventing de facto Social Security benefit increases and tax cuts that Congress never intended. Over time the savings would continue to grow.”

Yes, switching to chained CPI changes not only the cost of living adjustment for Social Security and other benefit programs that use a COLA, like federal pensions and veteran’s benefits. It also changes the cost of living adjustment for…. tax brackets. A tax bracket that might go up, say, $100 year-over-year would only go up $50, under chained CPI. And that means that higher tax brackets would be available at lower yearly income. This sounds technical, but the point is it’s a tax increase, designed to bring in $60 billion over ten years. What’s more, it’s a regressive tax increase.

The U.S. has a progressive income tax system that taxes higher incomes at higher rates. For example, a married couple making $50,000 in taxable income pays a 10 percent tax on the first $17,000 and a 15 percent tax on the rest.

Those thresholds, or brackets, are adjusted each year to ensure that people don’t get a tax increase just because their incomes increase with inflation. Adopting the Chained CPI would mean smaller adjustments to the brackets, leading to higher taxes for people at just about every income level.

Low-wage workers would eventually see the biggest increases, while high-income taxpayers would see only small changes. That’s because the wealthiest taxpayers already pay taxes at the highest marginal rate, currently 35 percent.

For example, by 2021, taxpayers making between $10,000 and $20,000 would see a 14.5 percent increase in their income taxes with a Chained CPI, according to an analysis by the Joint Committee on Taxation. Taxpayers making more than $500,000 would get a tax increase of 0.3 percent, while those making more than $1 million would get a tax increase of 0.1 percent.

2/3 of the tax increases under this change would be paid by people making under $100,000 a year.

This is the second proposed regressive tax increase in the last year. In the December Bush tax cut deal, they swapped out the Making Work Pay tax cut for the payroll tax cut, which actually increased taxes for everyone making about $20,000 a year or less.

Now, you’ll hear a lot of people saying that this is just a technical fix, a more accurate measure of inflation. But we have a lot of options to deal with the budget deficit. This particular one cuts Social Security and other benefit programs while raising taxes disproportionately on the working poor. Forget everything else about CPI and inflation indexes. That’s what this would do. And while Social Security advocates understand that, only a few conservatives have been willing to talk about this stealth tax increase, Grover Norquist among them. I imagine their gambit would be to try to get chained CPI applied only to benefit programs and not tax brackets. But that would mean virtually no impact to the deficit.

I hope Nancy Pelosi’s right and this has all been put to rest. Because it’s just about the worst thing you could do for the economy right now.

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David Dayen

David Dayen