The geeky debt fix that might work

April 5, 2013: 8:20 AM ET
obama sanders inflation
President Obama will get a fight from progressives, including Sen. Bernie Sanders, if he backs a change in how inflation is measured as part of a debt-reduction deal with Republicans.
NEW YORK (CNNMoney)

It's dull. It's controversial. And it might work.

A change to the way inflation is measured could help President Obama and Republicans cut a debt-reduction deal this summer.

It's not the biggest way to cut deficits. But it might be a good compromise because it would reduce projected spending, which Republicans are pushing for. And it would also raise revenue, which Democrats want.

A potential deal killer: The change would incense many on the left who contend it will unfairly hurt seniors and veterans.

Obama's 2014 budget blueprint, due out Wednesday, might include a proposed switch to "chained CPI," or "superlative CPI" as it's also known. He has supported such a change in the past, most notably in his debt ceiling negotiations with House Speaker John Boehner in 2011.

From CNN.com: Obama to propose changes to Social Security

Proponents say chained CPI is a more accurate way to measure inflation than the way it's done now, which they say overstates growth in consumer prices.

On average, chained CPI is expected to grow 0.25% to 0.3% slower than the CPI measures used today, according to Marc Goldwein, who coauthored a report on the issue for the Bowles-Simpson Moment of Truth Project.

That doesn't seem like a huge difference, but it adds up over time. Between 2000 and 2011, for example, the usual CPI measures showed that prices rose by 34%. But as measured by chained CPI, the increase would only be 29%. The longer the time frame, the more pronounced the difference.

A switch to chained CPI would affect Americans in two ways.

It would slow the growth rate in all federal payments that are adjusted annually for cost of living. These include Social Security benefits, civilian worker and military pensions, veterans' benefits, and Pell Grants.

For example, Social Security payments would continue to grow every year, but by 2030, the median payment would be 3% less than it would be if today's inflation measure were used.

It would also slow changes to tax parameters that go up with inflation -- and that could mean somewhat higher taxes for many filers. Measures adjusted for inflation include income tax brackets, the standard deduction, phase-out levels for tax credits and contribution limits to 401(k)s.

All told, the switch to chained CPI could reduce spending over 10 years by $216 billion and raise $124 billion in revenue, according to Congressional Budget Office estimates. That would mean total deficit reduction of $340 billion, before counting interest savings.

To date, the fight over chained CPI has gotten most heated over Social Security ($127 billion saved) and in programs affecting veterans and the poorest elderly and disabled ($36 billion saved).

This is where Obama will likely face resistance from progressives.

"During his first run for the White House, in 2008, Mr. Obama said he would not cut Social Security. I hope he remembers that promise and keeps it," Senator Bernie Sanders, an independent known for his progressive views, wrote in a New York Times letter to the editor.

Sanders advocates for expanding the amount of income subject to the Social Security tax -- currently set at the first $113,700 of wages.

'Chained CPI' explained

Meanwhile, some liberal economists say chained CPI is not a better way to measure inflation for Social Security recipients, because they spend so much on health care, which rises faster than inflation.

By contrast, other liberal economists do see chained CPI as a more accurate inflation measure but say adjustments should be made to protect the most vulnerable from any hardships caused by the smaller benefit increases under chained CPI.

Obama has indicated he would support such adjustments, although he hasn't specified what they would be.

One option could be a one-time increase to Social Security benefits for seniors once they're in their 80s, said Goldwein, senior policy director at the bipartisan Committee for a Responsible Federal Budget. Another option: Exempting Supplemental Security Income, which pays benefits to poor seniors and the disabled, from chained CPI.

Combined, such protections could curb chained CPI's deficit-reduction potential by about $60 billion, Goldwein noted.

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