Break This Chain

by Ramesh Ponnuru

Reports are that Obama’s budget will include “chained CPI,” a new formula for calculating inflation that will lower Social Security benefits and raise taxes. Retirees’ benefits rise every year to keep up with inflation, and so do tax brackets. Most economists think that we over-correct for inflation by using an inaccurate measure. The measure has the support of a lot of conservatives.

It seems to me, though, that the ideal policy is to go in the other direction. Tax brackets should rise every year not just with inflation but also with real wage growth. Otherwise, the government takes a disproportionate share of any economic growth. Because such growth causes people to move into higher tax brackets, average tax rates rise over time without a vote.

Letting retirees’ checks rise with economic growth as well as inflation, meanwhile, would have the useful effect of letting retirees’ real benefit levels rise with their age. It seems to me that we handle Social Security in exactly the wrong way: We peg initial benefit levels–the size of the first check you get when you retire–to growth in wages, so that people who retire in 2040 get much larger real benefits than people who retire today. We ought to move toward having that initial benefit level just keep up with inflation, which would save a lot of money. Then we should let each retiree’s benefits rise faster than inflation every year.

If we want to tie taxes and Social Security benefits to inflation, this change makes sense. But I don’t think we should want that. The real impetus here is of course to reduce our long-term debt problem. There are better ways to do that.

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