"Chained CPI" offers gain without huge pain.
Much of the blame for the stalemate in deficit-reduction talks rests with conservatives opposed to any tax increase on anyone ever. But some liberals are apparently determined to show they can be just as irresponsible and obstinate when it comes to reining in unsustainable benefit programs.
Perhaps the best example of this is their opposition to a common-sense plan, put on the table during the "fiscal cliff" negotiations, to cut the deficit by $211 billion over 10 years by changing the formula the government uses to calculate inflation for taxes and benefits.
OPPOSING VIEW: Don't nickel-and-dime our seniors
Many economists are convinced that the current formula overstates inflation because it doesn't account for how people adjust to rising prices, drinking more tea, for example, when coffee prices spike. If the government switches to a more accurate version of the consumer price index — known in policy circles as "chained CPI" — Americans would face barely noticeable increases in taxes and curbs in benefits. But over time, these changes would lead to major savings for the government.
On the revenue side, the new inflation formula would raise $62 billion as certain tax breaks pegged to inflation, such as the personal exemption and the child tax credit, would grow ever-so-slightly slower.
On the spending side, the new formula would save $149 billion by slowing annual cost-of-living increases for various programs, including Social Security. Based on estimated inflation, in 2014 an average monthly Social Security benefit for someone retiring now would be $1,260 under the new formula, instead of $1,263 under the existing formula. By 2022, the average benefit would grow to $1,462 a month, $39 less than it would be under current law.
This would reduce the deficit by about $100 billion over 10 years. Its impact beyond a decade would be even bigger. The trustees who run Social Security estimate that the new formula would erase slightly more than half of the program's 75-year shortfall of $134 trillion.
So for all the talk of the need to raise the eligibility age, slash benefits or hike the payroll tax to shore up the retirement program, it turns out that a good bit of the problem can be fixed relatively easily.
These savings, to be sure, would have an adverse impact on some people of modest means, particularly those who rely on Social Security over several decades. But there are ways of dealing with the very poor and the very old without giving everyone benefits and tax breaks that overestimate inflation. One idea is to give low-income beneficiaries an increase once they have been on Social Security for 20 years.
In the fiscal cliff talks, many Democrats have balked at any deficit reduction that included reforms to Social Security, pushing the spurious argument the program isn't contributing to the deficit so shouldn't be part of reducing it.
Fact is, the program fell into the red in 2010 as the Baby Boom generation began to retire and the economy took a hit. In 2012, the government had to borrow $53 billion to pay Social Security's bills, plus $112 billion to cover the payroll tax holiday.
There's no painless way to curb entitlement spending, but tweaking the inflation formula is less painful than most alternatives. And maybe it could get lawmakers in the practice of actually making needed decisions, even showing some spine.
Source: http://www.news.theusalinks.com/2012/12/26/editorial-change-inflation-index-to-cut-deficit/
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