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Home Publications Blogs CEPR Blog President Obama Wants to Give a Bigger Hit to Seniors on Social Security than He Did to the Wealthy on Taxes

President Obama Wants to Give a Bigger Hit to Seniors on Social Security than He Did to the Wealthy on Taxes

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Written by Dean Baker   
Wednesday, 13 March 2013 18:02

That's what President Obama's aides keep saying. They generally don't put in those terms, probably because they assume that everyone already knows, but the cut to the typical senior's Social Security benefit from the adoption of the chained CPI would be a larger hit to their income in retirement than the increase in income taxes put in place at the start of the year is the typical affluent taxpayer.

The arithmetic on the chained CPI is straightforward. It reduces benefits by an amount that increases 0.3 percentage points each year a person is retired. This means that after 10 years the reduction in the annual benefit would be 3.0 percent, after 20 years the reduction would be 6.0 percent, and after 30 years the reduction would be 9 percent. If we assume that a typical beneficiary lives long enough to collect benefits for 20 years, their hit from the chained CPI would on average be 3.0 percent over this period.

For the typical retiree, Social Security benefits are close to two-thirds of their income. This means that the use of the chained CPI would amount to a hit to their income of approximately 2.0 percent (two-thirds of 3.0 percent).

By contrast, if we assume that a couple earning $500,000 a year is the typical household affected by the tax increase, then their additional tax burden will be 4.6 percent of their income over $450,000 or $2,300. If we assume that this couple had not unusual exemptions (or even usual ones), then their after-tax income before the tax increase would have been around $350,000. This means that the Obama tax increase would reduce their after tax income by a bit less than 0.7 percent. This means that the hit to Social Security beneficiaries from the chained CPI will be around three times as large as the hit to the typical affluent taxpayer from the Obama tax increase.

Reduction in Income:
Chained CPI and Obama Tax Increases

 

Comments (3)Add Comment
On-COLA
written by Bruce Krasting, March 14, 2013 7:32
Dean fails to put these numbers into perspective.

From 2013 - 2023 SS is scheduled to pay - $11 Trillion!

The reduction from the change in COLA is $340B.

So with the Cola change SS will still pay out $10,660,000,000,000.

And Dean is complaining........
On the topic of Gene Sperling
written by Chris Engel, March 14, 2013 8:27
He did a Reddit AmA where he was asked about Chained CPI and how he's referred to it as "correcting CPI", to which he responded dismissively, ignoring the CPI-Elderly and making an appeal to authority in insisting that Chained CPI is the way to go:

http://www.reddit.com/r/IAmA/c...?context=3

The cost of living question relates to how the government measures inflation. Today, we use a measure of inflation called the “CPI” or consumer price index. An alternative would be to switch to what is known as the superlative or “chained” CPI. The superlative CPI makes two technical corrections to the standard CPI: it accounts for consumers’ ability to substitute between goods in response to changes in relative prices and accounts for biases arising from small samples. Most experts agree that the Superlative CPI provides a more accurate measure of the average change in the cost of living than the standard CPI.
The President would prefer to have this adjustment in the context of a larger Social Security reform, but he has said to Speaker Boehner that if it is part of a larger agreement that would include tax reform that would raise revenue by cutting loopholes and expenditures from the most well off, that he would be willing to agree to it because in divided government, if we’re going to make progress, we have to be willing to compromise. One important note: any agreement to make this change to the CPI must include a dedication of a portion of the savings to protections for low-income Americans, certain veterans, and older Social Security beneficiaries. Our current offer which reduces the deficit by $230 billion over the next 10 years includes those protections.


Of course, if you "chained" CPI-Elderly, you end up with mainline CPI anyway, so the current benefit scheme ends up acting being fair in the way it indexes inflation, since it accounts for alternatives but also the limited basket that elderly citizens consume.

It's worth noting that, if Chained CPI is only offered as a way to bargain with the GOP, it could be that Social Security is safe, as during the Fiscal Cliff negotiations it was Republicans like Marco Rubio who helped ensure that SS was not part of any deal:

http://www.tampabay.com/news/p...ty/1269292

The question is, do we believe Gene Sperling's insistance that this is against the will of Democrats? Are we going to have to rely on Democrats and Bernie Sanders, who has even brought up the possibility of filibustering any cuts to Social Security:

http://videocafe.crooksandliars.com/heather/sen-bernie-sanders-vows-block-any-grand
Inflation adjustments start at age 62, not at retirement
written by Mike B., March 16, 2013 9:08
I think the hit from going to the chained CPI starts at age 62, not when the person retires. So someone who retires and starts collecting benefits at age 70 has initial benefits that would be more than 2% below current law.

This is because benefits are based on earnings which are adjusted for changes in the average wage until age 60, after which nominal dollars are used. After this wage adjustment, benefits are calculated including inflation adjustments for the years from age 62 (in the example above, from age 62 to 70).

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