56°
Cloudy
MON
 78°
 53°
TUE
 80°
 59°
WED
 78°
 57°
THU
 72°
 53°
FRI
 74°
 51°

McManus: Will Obama be able to sell the idea of a 'chained CPI'?

President Barack Obama didn't release his proposed budget for 2014 until Wednesday, but liberals and the AARP have been howling all week about something they expected to be in it.

What has our president done to provoke such outrage among his supporters? He's chained CPI.

In an attempt to meet Republicans halfway in the battle over taxes and spending, Obama has offered to change the formula for calculating Social Security's annual cost-of-living increase — an "entitlement reform" GOP leaders have long asked for.

The result would not change current Social Security benefits, but it would reduce future raises by an estimated three-tenths of 1 percent in the first year, or about $42 for the average beneficiary. Over the long run, thanks to the magic of compounding, a lower rate of increase would have a substantial effect. After 20 years, estimating very roughly, a retiree might be looking at a yearly payout more than $1,000 less than he or she would have received without the change.

To progressives like Sen. Bernie Sanders, I-Vt., that's an unconscionable cut. But others, including former House Speaker Nancy Pelosi, D-San Francisco, are willing to back Obama on this one. "Let's take a look at it," Pelosi said recently.

If you've read this far, you're ready for the technical explanation, which requires some background.

When Congress enacted Social Security in 1935, there was no provision for increases. Until 1950, benefits didn't rise at all, but since 1975, annual cost-of-living adjustments have been automatic, based on the consumer price index.

The problem is there's more than one way of calculating the consumer price index. Right now, Social Security increases are based on the Bureau of Labor Standards' CPI-W, for urban workers. But the agency also calculates the index in other ways, including one known as C-CPI-U, or "chained CPI." The old-fashioned CPI is based on a fixed "market basket" of commodities. When their prices rise, the index rises proportionally. Chained CPI adds in something called the "substitution effect": When prices go up, people change what they put in the basket. When the cost of beef increases, for example, consumers switch from steak to chicken, which means their cost of living doesn't rise as fast as the old-fashioned CPI would suggest.

As a result of the calculation differences, chained CPI rises a little more slowly than regular CPI — by about one-quarter of a percentage point less per year over the past 10 years, according to Robert Greenstein at the Center on Budget and Policy Priorities.

Many economists say chained CPI is a more accurate way to measure the cost of living for retirees and therefore it should be the basis for Social Security adjustments.


© The Press Democrat |  Terms of Service |  Privacy Policy |  Jobs With Us |  RSS |  Advertising |  Sonoma Media Investments |  Place an Ad
Switch to our Mobile View