U.S. Economy

Obama Backs Down From Social Security Change


Switching to a new inflation measure would lower the growth of Social Security benefitsCenter for Economic and Policy ResearchSwitching to a new inflation measure would lower the growth of Social Security benefits

 

President Obama’s decision to change the inflation formula for Social Security is a victory for the elderly and a defeat for people who worry that U.S. social spending is becoming unsustainable. One thing both sides can agree on is that this is not a value-neutral, technical tweak.

As Bloomberg reports today, Obama is setting aside an earlier proposal, welcomed by congressional Republicans, to switch to the “chained” consumer price index for calculating the growth of Social Security benefits. That index shows a lower rate of inflation than the one that the government uses now, known as CPI-W. The chart above from the Center for Economic and Policy Research shows that if the chained index had been used from 2001 to 2012, it would have left benefits lower by an amount equal to the entire 2012 cost-of-living adjustment.

Wonky aside: “Chaining” means using an ever-changing market basket of goods and services to calculate inflation. Each month’s basket, being slightly different from the ones before and after, is like a link of a chain. The logic of chaining is that customers tend to switch from goods that go up in price to cheaper alternatives, and if you don’t account for that behavior you end up overstating the rise in the cost of living.

Opponents of chained CPI don’t dispute the concept of chaining, but they say there’s a different problem. Both regular and chained CPI give too little weight to things that the elderly consume more of, particularly health care.

The nonpartisan Congressional Budget Office said in November that switching to chained CPI would save more than $160 billion over 10 years. But of course, it would do so by taking money out of the pockets of seniors. Whether that’s a good or a bad thing depends on whether you think—as some people do—that senior citizens are consuming a disproportionate share of the nation’s resources. PBS NewsHour posted a vigorous debate on the merits in this article last year.

Two things to note: One, Obama was never a big fan of chained CPI. He expressed openness to the idea last year as part of a grand budget compromise with Congress. He has since lost faith that such a deal can be struck. Two, taking money out of one pocket and putting it into another won’t solve America’s serious long-term financial problems. For that, the only answer is reforms that truly lower costs and raise the economy’s wealth-producing capacity.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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