Chained CPI: Why Liberals Are Wrong When It Comes to This Social Security Debate

Earlier this week, President Obama came under attack from liberals for daring to suggest that Social Security should calculate cost of living adjustments (COLAs) in a more accurate way. Obama’s 2014 budget proposal includes, among a number of other provisions, calculating Social Security COLA with the Chained CPI index rather than the CPI-W which is currently used. The difference between the two is that Chained CPI corrects a mistake made by the CPI-W, namely that the CPI-W incorrectly assumes that consumers don’t change their purchasing habits in response to changes in relative prices. Translated out of economic jargon, that means that CPI-W thinks that if a family spends $250 a month on beef, and the price of beef doubles, that the family has their cost of living increased by $250 a month. This is a bad metric for measuring actual cost of living, since it’s more likely the family in question would buy less beef and start buying chicken or pork. By understanding this behavior, known in budget-speak as “higher level substation bias,” Chained CPI provides a more accurate way to index cost of living adjustments.

Moving Social Security COLA to Chained CPI should have happened back in 1996, when it was recommended by the Boskin Commission that studied the federal government’s use of Consumer Price Indexes. Regardless of political philosophy, or one’s position on the direction Social Security should go in, all politicians should want Social Security to accurately adjust for cost of living increases. Prominent left-leaning think tanks like the Center for American Progress and the Center for Budget and Policy Priorities have endorsed the move to Chained CPI. Unfortunately, these endorsements have not had much effect outside of the wonk community. As happens all too often in Washington, what should be a simple matter of technocratic adjustment has become a political battleground.

Congressional Democrats and liberal pundits were quick to condemn Chained CPI using arguments which blend sophistry with ignorance. Paul Krugman called the change to Chained CPI “purely and simply a benefit cut,” a claim which, despite being echoed by many legislators, is completely false since the only changes will be to the rate of benefit increases and absolutely no Social Security recipients will have their payments decrease.

Sen. Tom Harkin (D- Iowa) tweeted “Chained CPI is an attack on Social Security, a program that by law is unable to add to the deficit.”  This ignores the entire history of Social Security COLA, which was not part of the original law passed by FDR but rather was added by Arkansas Congressman Wilbur Mills in 1972 when he was the Chairman of the Ways and Means Committee and wanted a popular policy achievement to be the centerpiece of his short-lived Presidential campaign.

Beyond the lack of historicity, Harkin’s claim that Social Security is unable to add to the deficit is only true because of an accounting fiction in which Social Security is declared “off-budget.” That distinction matters in the Byzantine world of budget politics, but is irrelevant to the unified deficit, which is what the Congressional Budget Office focuses on when analyzing America’s fiscal health. Social Security adds to the unified deficit because overall Social Security costs are projected to rise by about 25 percent more than the Social Security tax base over the next two decades. Implementing Chained CPI would reduce the deficit by $220 billion in its first 10 years of implementation and help correct the imbalance between Social Security’s costs and its tax base.

Liberal reaction to Chained CPI illustrates one of the paradoxes the current political climate – that modern liberals, who consider themselves the most amenable to progress and change, have become as reactionary on entitlements as the William Howard Taft-led conservatives were to the New Deal during the late 1930s. To these reactionary liberals, the current COLA calculations for Social Security are as sacrosanct as the program itself, because to give an inch on entitlement reform would send America tumbling headfirst down a slippery slope into the total elimination of the programs. This thinking is the liberal analog to the NRA’s apocalyptic fears that any gun regulations will lead inevitably to gun confiscation around America, and such scaremongering is just as silly from Paul Krugman as it is from Wayne LaPierre.