Even with Exemptions, Chained CPI Proposal Will End Up Hurting Low-Income People

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Written by Shawn Fremstad   
Wednesday, 10 April 2013 17:25

The budget documents released so far today don’t provide much detail on the President’s proposal to switch to the chained CPI. But a short section on the proposal, at page 46 of the budget, says that the shift to the chained CPI would be made for “most programs and the Internal Revenue Code” and that it “includes protections for the very elderly and others who rely on Social Security for long periods of time, and only applies the change to non-means tested benefit programs.” And a just-released White House fact sheet claims that the proposal is coupled with “measures to protect the vulnerable and avoid increasing poverty and hardship.”

Does this mean people who rely on means-tested benefits and low-income income people generally should breathe a sigh of relief? Hardly. Here are some reasons why (setting aside for the moment the impact of the chained CPI on Social Security for low-income retirees, which I’m sure my colleague Dean Baker will have more to say about):

1) Although Disability Insurance is not a means-tested benefit, the benefits it provides and the typical incomes of the workers receiving benefits are already quite modest. On average, female workers receiving Disability Insurance receive a benefit of only $993 a month and male workers receive a benefit of $1,256 a month. As a result, a woman with a disability living on her own and relying solely on an average Disability Insurance benefit has an income that is barely equal to the extremely austere poverty line (HHS’s monthly poverty guideline for 2013 is $958). Thus, for typical disabled workers receiving Disability Insurance, even seemingly modest benefits cuts over the short run can be a big deal. The White House fact sheet says that their plan includes a “benefit enhancement” for people who receive Disability Insurance benefits for more than 15 years, one that is phased in over a subsequent 10-year period. But that means 15 years of cuts first. And many disabled workers will not live long enough to see any of the subsequent phased-in "enhancement."

2) The exemption of means-tested programs (including Medicaid, ObamaCare premium assistance, Supplemental Security Income, Pell Grants, and certain nutrition assistance programs) and the poverty guidelines detailed in the White House fact sheet will almost certainly be only a very temporary exemption. Once the chained CPI is adopted for the tax code and Social Security—an immensely popular program, in large part because it is tied to workers’ contributions—it will only be a matter of time until it is applied to the less-popular, non-contributory means-tested ones. And, until the chained CPI is applied to means-tested programs, conservative opponents of those programs will have a field day decrying what I imagine they’ll label along the lines of “liberals’ special treatment for welfare recipients” and perverse preference for “welfare over work.” It’s worth remembering here that some means-tested programs have no automatic inflation adjustments. Funding for Temporary Assistance, for example, has been frozen in nominal dollars for nearly two decades. So, advocates for low-income people shouldn’t be optimistic about holding the line against the chained CPI in the means-tested programs that lucky enough to have COLAs.

Once applied to means-tested programs, the chained CPI would produce substantial cuts over time as Alison Shelton of the AARP Public Policy Institute shows in an excellent brief detailing the impact of the chained CPI on benefit programs.

3) Applying the chained CPI to the tax code will reduce the value of refundable tax credits, particularly the Earned Income Tax Credit, and increase tax rates on low-income, working class people. CBO had previously estimated that the cuts to refundable tax credits would add up to $17.9 billion over the next ten years. The Urban-Brookings Tax Policy Center has estimated that 45 percent of tax units in the lowest income quintile (below $26,000) and 84 percent of tax units in the second quintile (roughly $26,000 to $47,000) will pay about $175 more on average in taxes in 2020. Now, this may not seem like a lot, but if you’re a poorly compensated worker trying to raise two children on $10 an hour, every dollar counts.