A Minute With...

Richard Kaplan, expert on elder and tax law

4/9/2013  8:30 am

The White House’s 2014 budget will likely include the politically risky move of changing the formula that calculates the impact of inflation upon Social Security benefits and federal income tax brackets. Law professor Richard L. Kaplan, an expert on elder and tax law, discusses the merits of switching to a “chained” consumer price index in an interview with News Bureau business and law editor Phil Ciciora.

What is “chained” CPI, and how does it differ from the regular consumer price index?

image of professor richard kaplanIt amounts to changing the consumer price index that’s used for calculating Social Security benefits. It’s also used to adjust the federal income tax brackets to protect against inflation.

The original statute says that Social Security cost-of-living adjustments will be made through the consumer price index. In the early 1970s when this law was passed, there was only one consumer price index. Subsequently, the Bureau of Labor Statistics has come up with several different indices, including the one used for the tax code, the consumer price index for urban consumers and a very similar index, the consumer price index for urban wage earners that is used to adjust Social Security benefits and federal pensions.

There’s also a so-called “chained” CPI that is more controversial. The idea is, if the price of beef rises, people will buy chicken or pork instead because those goods are cheaper. There’s a genuine question whether people really make those sorts of substitutions, but that kind of logic is already incorporated in the existing consumer price indices.

The “chained” version takes this concept one step further and contends that if food prices go up, people will spend more money on gas to drive somewhere to buy cheaper food. That’s much more controversial.

How much would switching to “chained” CPI likely save?

The Obama administration estimates savings of $254 billion over 10 years, which is three times the projected savings of the current budget “sequestration,” the automatic budget cuts that began in early March. The real impact of this change, however, is cumulative over time and could be more significant after the first decade of its implementation.

Why is this change to Social Security benefits suddenly a bargaining chip?

“Chained” CPI is a win-win for the government. Not only will the government pay out less in Social Security benefits, but additional taxes will come into the government because the income tax brackets, the personal exemption and the standard deduction will rise more slowly. As a result, people will pay more in taxes.

Politically, the “chained” CPI upsets both parties: It reduces government benefits that Democrats want to preserve and it increases taxes that Republicans want to cut. Consequently, it looks like something that both sides can accept because it represents a “balanced” approach to deficit reduction.

What impediments exist to switching to “chained” CPI?

Actually, the Social Security Administration could switch to a “chained” CPI today. The original legislation did not specify which consumer price index to use, so they could adopt the “chained” CPI without specific authorizing legislation.

That said, the Social Security Administration undoubtedly prefers that Congress provide legislative cover to adopt such a major change.

Instead of using “chained” CPI, should the Social Security Administration employ a price index more focused on the buying habits of older Americans?

That’s an important and largely under-reported issue. In fact, the Bureau of Labor Statistics has such an index called the CPI-Elderly. This index gives greater weight to health care costs than the regular CPI. Households with at least one member age 65 and over tend to spend two to three times as much of their budget on medical care than do younger households.

When you compound that reality with the fact that health care costs rise faster than other goods and services, a legitimate argument could be made that Social Security undercompensates older people for inflation. Using the CPI-Elderly, therefore, might be more accurate but it would increase Social Security benefits, which is the opposite of what the effort to reduce the deficit is trying to do.




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