I have said before there has been very little talk about cutting spending during the fiscal-cliff negotiations. In the last few days, however, the president has been said to have made a gigantic concession to the other side by agreeing to move the COLA from the current CPI-W to the so called “chained CPI.” The latter is supposed to provide a better measure of inflation because it assesses how consumers change their behavior in response to changes in prices, rather than looking at a constant basket of goods. The change has drawn criticism from Senator Dick Durbin to AFL-CIO president Richard Trumka. One of the complaints is that it would slash thousands of dollars from Social Security benefits, thus balancing the budget on the back of the poorest Americans. The truth, however, is very different.
Over at Market Watch, my colleague at the Mercatus Center, and former acting deputy commissioner of Social Security, Jason Fichtner, did the math:
What does this mean in actual dollars? The average retired worker on Social Security received $1,240 a month in 2012. The scheduled 1.7% COLA for 2013 will increase this average monthly benefit to $1,261, or a $21 increase per month. If the COLA was instead based on the chained CPI , the 1.5 % increase would bring the average monthly benefit up to $1,259, a $19 increase in monthly benefits and only $2 less per month than based on the current CPI.
So basically, the change would slow the growth of benefits by $2 dollar a month, or $24 a year. That’s that nothing like the kind of benefit cuts that seniors will experience in 2033 when the Social Security Trust Funds dry up and benefits are actually cut across the board by over 20 percent. Fichtner adds:
The Social Security Trust Funds are currently estimated to become insolvent in 2033 . While I understand every dollar counts when you’re on a fixed income, a difference of $2 a month ($24 a year) hardly amounts to draconian benefit cuts for seniors. That said, I think it’s important to stress that moving to a chained CPI isn’t just about saving money or slowing the growth of benefits, it’s primarily about getting the measure of inflation correct. The change to a chained CPI should be made even if it didn’t produce appreciable savings. It should be done because it’s a more accurate measure of inflation. The goal of the COLA is to protect beneficiaries’ purchasing power accurately, and moving to a chained CPI accomplishes this goal.
I will add this: While I think the inflation-measure adjustment is a useful first step, I find it weird that Social Security should be singled out during these negotiations. Obviously, this is probably because it is perceived as the lowest hanging fruit on the entitlement tree. But, as is often the case, low-hanging fruits don’t make for big savings and won’t get us where we need to go to put this country back on the sustainable fiscal path.
Now how about real spending cuts and reforms? I have said it before, everything must be on the table. That means Medicare, Social Security, defense, and the rest.