Dispelling Chained CPI Myths

Dead on arrival… When President Obama released his budget recently, Congressional Republicans immediately shot it down. This was no surprise because the budget called for tax increases, which Republicans vehemently oppose. However, I was puzzled by the negative reactions of a few Democrats; after all, President Obama’s budget included many progressive ideas, such as more stimulus spending. What could have caused such dissent from his party? Well, the budget called for the adoption of Chained CPI to measure future inflation; a move that Democrats and Republicans condemned as an assault on seniors and a severe benefit cut. 

Shifting to Chained CPI entails updating and improving the way the federal government measures inflation for various government programs. The government indexes benefits (such as Social Security), in order to keep up with inflation, so that both rise at the same rate. The government has not changed the way it calculates inflation in quite some time. Since the 1990s, Chained CPI has been viewed as a more accurate measure of inflation than our existing policy because current estimates overstate inflation and, hence, benefits paid.

This brings me to the first myth about Chained CPI. Chained CPI is NOT a benefit cut. Chained CPI slows down the rate of growth of social security payments. Seniors will not wake up next month and receive any fewer dollars in Social Security benefits than they are used to. Chained CPI would shave only 0.3% off inflation estimates or about $9 annually for the average couple that retired in 2010. Under Chained CPI, Social Security benefits would keep up with cost of living, rather than increase faster than inflation as they do now. 

In fact, moving to Chained CPI actually helps strengthen Social Security. By 2033, the Social Security trust fund will be depleted and will require a massive increase in the payroll tax or a 25% across-the-board decrease in benefits. As the Baby Boomers retire over the next two decades, more and more pressure will be put on the Social Security trust fund. The worker-to-retiree ratio has fallen from 5:1 in 1960 to 3:1 in 2010 and will only continue to decline, which means less revenue to support beneficiaries. In two decades, Social Security will no longer be solvent. Imagine the horrors if the checks actually stopped coming! The shift to Chained CPI will help maintain social security for current and future retirees.

Another prevalent myth claims Chained CPI is a hidden tax increase that will hurt the poor, the disabled, and the elderly. Chained CPI will slow the growth rate for income tax brackets. Individuals right on the cusp of a higher tax bracket may suddenly be “bumped up” into a higher one. However, it is important to remember two points. First, due to our marginal income tax system, only the small portion of above the threshold will be taxed at a higher rate, and second, Chained CPI should be viewed as only one part of comprehensive tax reform.

Chained CPI alone will not solve our budget deficit problem nor will it close the Social Security funding gap, but Chained CPI or a similar policy will play an integral role in any budget deal between Democrats and Republicans. The switch has already been a part of most major bipartisan deficit-reduction plans (Simpson-Bowles, Domenici-Rivlin, Obama-Boehner). Fix the Debt, a non-partisan movement to fix America’s finances, states that the switch to Chained CPI will reduce the social security funding gap by 1/5 and reduce deficits by more than $300 billion over the next decade.

Chained CPI is not just smart policy; it is also smart politics. Congress and the President can easily find a way to make this happen and doing so will prove that both Democrats and Republicans are serious about solving America’s deficit crisis. Furthermore, Chained CPI does not just kick the can down the road to future generations. It asks all Americans, old and young, Democratic and Republican, to be willing to exchange a small amount of personal sacrifice for a whole lot of societal benefit.                 

Chad Kolinsky is a graduate of the University of Miami and a blogger for The Can Kicks Back (www.TheCanKicksBack.org), a non-partisan and Millennial-driven movement to fix the national debt. 

Investing in Growth

            The word on everyone’s mind is sequester.  Turn on the news, the radio, or pick up a magazine and you will see it.  The sequester is a series of indiscriminate spending cuts to lower our nations budget deficit.  It will cut government programs across the board; excluding entitlement spending (the true cause of our debt crisis).  Entitlement spending requires more and more of our nations budget each year and yet our leaders in Washington refuse to discuss actual reform.  President Obama has proposed to base future entitlement payments on chained-CPI, which will save a substantial amount of money.  However, this does not address the fundamental problems with Medicare and Social Security (high medical costs combined with an aging population). 

            Even better, the sequester is a manufactured crisis; a result of Washington’s inability to compromise and lead our nation out of a weak recovery.  The purpose of the sequester was to force Democrats and Republicans to work together for real reform.  Who in their right mind would allow these indiscriminate budget cuts?  Our leaders in Washington would HAVE to make a deal before the sequester comes into effect.  Once again the American people have been let down. 

            With all this talk of spending cuts, one key aspect of our recovery is lost in the noise.  Where is the discussion of growth?  How will Washington help the American economy prosper in the 21^st century?  We might be able to cut our way to lower deficits, but we cannot cut our way to more economic growth.  The best way to increase revenues and decrease our deficit is to increase the taxable base.  What better way to increase revenues, then through growth inspired policies?  The faster the economy prospers, the quicker a solution to our debt will emerge. 

            Today’s low interest rate environment puts us in a unique position to invest in our future.  With interest rates at record lows we can borrow and invest to help our nation prosper.  But we must act now!  If the FED’s minutes this week showed anything, it was the fact that interest rates will not be low forever.  Washington’s fiscal policy needs to compliment the FED’s monetary policy. 

            Now some people may argue that the government has tried and failed to steer the economy in the right direction.  They will point to the trillion dollar deficits of the past four years and failed investments in companies like Solyndra and A123.  However, I beg to differ.  Imagine what our economy would look like today if the government spent trillions on research and development, education, and infrastructure rather than bailing out big banks.  What we need today is a smarter government that invests its limited funds efficiently; not a smaller government that you can  “drown in a bathtub”. 

             Like it or not the government plays an instrumental role in steering the economy.  It is time to move beyond the ideology of how we would like our government to be and accept the reality of what government is.  Washington has played an important role in the economy for generations.  President Eisenhower, a republican, invested in America’s infrastructure and help build the interstate highway system, which revolutionized commerce in our nation.  The Apollo program provided advances in technologies ranging from kidney dialysis, to semi-conductors, to athletic shoes.  And we should never forget that the United States Military played an instrumental role in developing ARPAnet, the precursor to the Internet. 

            The American economy is revved up and ready to go; we just need Washington to clear us a path.  Will they decide for a short-term Band-Aid or real investment in our future?  Will they maintain entitlements for the older generations or provide a future for the younger generation?  It is time for millennials to make our voice heard in Washington.  Our government needs incentives to focus on long-term solutions.  It is time for us to stand up and demand a prosperous future!