Chained CPI with Bill Maher

 

“It sounds like a bad detective show on CBS.” That’s how HBO personality Bill Maher described the “Chained CPI” (Consumer Price Index) measure used to calculate inflation on Real Time with Bill Maher this past Friday night. Comedic interludes aside, Maher moderated a serious discussion regarding the President’s use of this alternative CPI measure as a form of deficit reduction in his newly released budget. The ensuing debate was characteristic of the current media discourse surrounding the issue, first explaining these esoteric words in layman’s terms before outlining the arguments for and against its adoption.

When prices rise on particular goods, consumers alter their consumption habits, substituting these goods with relatively cheaper ones. This principle is unaccounted for in the CPI statistic presently employed by the government, which estimates inflation by examining price changes of the fixed basket of goods purchased by the average consumer. Chained CPI, however, assumes, as Maher said, “if you used to eat steak, now you can eat chicken.” It adjusts for this “substitution bias”, producing lower, and as many economists suggest, more accurate inflation statistics.

The technical nature of this change may seem somewhat dull and uncontroversial, yet as evidenced by archliberal panelist Senator Bernie Sanders’s (I-VT) outrage, its implication for Social Security recipients renders it a political disaster. Regardless, this does not necessarily speak accurately to its policy virtues. Sanders laid out many of the recurring arguments against Chained CPI, and more broadly Social Security reform, which are briefly analyzed here void of the all-too-common political propaganda that surrounds Social Security.

  • These “massive cuts” would be devastating to seniors and the disabled, who already receive transfer payments that are already “too stringy…because [CPI] doesn’t measure what seniors actually buy.”

“Massive” may be an overstatement, but admittedly, switching to a Chained CPI would reduce cost-of-living adjustments (COLA) indexed to inflation for Social Security recipients. The average annual inflation growth using Chained CPI for the last ten years has been around .3 percentage points lower than the current measure, meaning that the COLA afforded to seniors would have been slighter lower, while still keeping pace with rising prices.[i]

Sanders second claim, to the contrary, is simply unfounded given the most recent data. Since 2006, the Bureau of Labor Statistics’ specific CPI index for seniors (CPI-E) has risen by 2.3% annually, while the CPI statistic he was lambasting rose by .1% more on average.[ii] Although Sanders is correct in that the standard CPI basket does not reflect seniors’ heavy purchases of medical care (i.e. “what they actually buy”), the basket of goods for the average senior has actually experienced less inflation than that of the standard CPI; hence, it is not “too stingy.”

  • In response to fellow panelist, conservative economist Stephen Moore’s assertion that the Social Security Trust Fund is essentially “bankrupt”, Sanders retorted, “The Social Security Administration, who should know something about the program, tells us there’s 2.7 trillion dollar [surplus in the trust fund].”

This argument between Moore and Sanders reflects the substantial chasm in the political world regarding the solvency of Social Security as it is. The SSA reported in 2012 that the trust fund does have assets in value of $2.7 trillion, but as Moore correctly pointed out, they are in the form of U.S. Treasury securities. Without delving into the implications of the type of holdings, it is important to note the SSA’s projections for the program in both the short- and long- term:

“The Trustees project that the assets of the OASI Trust Fund and of the combined OASI and DI Trust Funds will be adequate over the next 10 years under the intermediate assumptions. However, the projected assets of the DI Trust Fund decline steadily, fall below 100 percent of annual cost by the beginning of 2013, and continue to decline until the trust fund is exhausted in 2016. The DI Trust Fund does not satisfy the short-range test of financial adequacy…   

The projected combined OASI and DI Trust Fund assets increase through 2020, begin to decline in 2021, and become exhausted and unable to pay scheduled benefits in full on a timely basis in 2033.” [iii]

While the Old Age and Survivors Trust Fund is “adequate over the next 10 years,” the program for the disabled, “the veterans who have lost their arms and their legs” as Sanders put it, would be “inadequate” in three years under the existing legislation. In the long term, the picture is even bleaker with Social Security turning insolvent by 2033. The Senator apparently chose not to read that part of the SSA’s report.

  • It is clear that someone will have to pay for Social Security, and the greater national deficit that hovers just under $1 trillion, owing to the “sequester cuts” and its accompanying tax increases. Sanders solution – “ask the billionaires to start paying their fair share of taxes and the huge tax loopholes which are out there which are costing us $100 billion a year.”

This question, which cuts to the heart of the debate on our government’s fiscal health, has already been litigated (see: 2012 Presidential Election). President Obama, probably to the right of Sanders on this issue, has called for a “balanced approach” to deficit reduction. Switching to Chained CPI would, seemingly to Sander’s surprise, raise significant revenue. Tax brackets, deductions, and credits are all indexed to inflation; therefore, a lower inflation statistic “would mean somewhat higher taxes.” This would result, according to the CBO, in $216 billion in cuts over 10 years and $124 billion in increased revenue.[iv] Not exactly balanced, but close to it.

In the Social Security Administration’s own words, “Implementing changes soon would allow more generations to share in the needed revenue increases or reductions in scheduled benefits.”[v] It is abundantly clear Social Security needs fixing for its own survival, let alone that of the entire economy. Uncle Bernie is right that switching to Chained CPI will reduce transfer payment increases compared to the CPI now in use. Until he or Bill proposes a better idea, though, Chained CPI should receive an extensive, fair trial in the debate on Social Security reform.

 


[i] http://www.ssa.gov/OACT/TR/2012/2012_Long-Range_Economic_Assumptions.pdf

[ii] http://www.bls.gov/opub/ted/2012/ted_20120302.htm

[iii] http://www.ssa.gov/OACT/TR/2012/tr2012.pdf

[iv] http://money.cnn.com/2013/04/04/news/economy/chained-cpi-deficits/index.html

[v] http://www.ssa.gov/OACT/TR/2012/tr2012.pdf

 

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