When President Obama proposed so-called chained CPI in his 2014 budget, he outraged his Democratic base, the labor unions, and the AARP.
Republicans weren’t bowled over by the idea, either. They appreciated it as an opening salvo at reducing federal spending, but hardly thought it went far enough in overhauling entitlement programs.
To appease liberals, Obama’s blueprint offers protections meant to shield low-income senior citizens, children, and disabled people from any reduction in payments that would result from using an alternative measure of inflation linked to the consumer price index (known as chained CPI) to calculate such government benefits as Social Security.
So exactly which programs are exempt? And do proposed protections go far enough to protect low-income people?
Means-testing means exemption. According to the president’s budget plan, any means-tested entitlement program would be exempt from chained CPI. This includes veterans’ pensions and benefits; food stamps (formally called the Supplemental Nutrition Assistance Program) and other children’s nutrition programs; Pell grants; and the Supplemental Security Income program for low-income seniors and disabled people who have very few financial resources.
The oldest seniors get an extra boost. Obama’s budget proposes increasing benefits for those ages 76 and older, or anyone who has received Social Security payments for 15 years. Older seniors are especially vulnerable because many of them deplete their pensions, IRAs, and other assets as they age and their health care costs grow.
This exemption would give them a slight incremental boost in benefits, phased in over 10 years. By the end of that window, the average annual bump in benefits would be about 5 percent, or an average of about $800, according to estimates from the White House Office of Management and Budget. If those same beneficiaries live to age 95, they would get another boost in benefits.
The later increase would be subject to changes in inflation and would go to people regardless of their means or income—an idea that not all economists support. Many economists and deficit-reduction groups would prefer that well-off people receive less in Social Security benefits if the federal government is going to start tweaking the formula.
“There will be some people who get a bump up who are quite comfortably well-off. One could argue that it is not clearly warranted for them,” says Robert Reischauer, former director of the Congressional Budget Office.
The middle class might feel it most. If chained CPI ends up happening as part of a budget deal, the people who would suffer the most could be working people or those in the middle class who do not have private pensions, huge savings accounts, or many assets to sustain them in retirement.
“We’re worried about someone who has worked their whole lives and who has a modest income—someone who is a middle-class individual, who will find himself facing an unexpected cut in retirement and waiting for a benefit enhancement that takes 10 years to amount to something,” says Cristina Martin Firvida, director of economic security for AARP.
These people will not be exempt from chained CPI, and they will see their benefit amount reduced. The average benefit for a Social Security recipient in 2012 was $1,234 per month, according to the left-leaning Center on Budget and Policy Priorities, and for 65 percent of Social Security recipients, this check provides the majority of their cash income. For one quarter, it is the sole source of income in retirement.
This article appears in the April 16, 2013 edition of NJ Daily.