Conservative AEI opposes Chained CPI for Social Security. Says not appropriate.

[madfloridian]

Interesting article by a former Bush staffer, principal deputy commissioner of the Social Security Administration (SSA).

There is some kind of weird juxtapositioning going on about this topic.

Now we have the White House and some more liberal Democrats trying to excuse that it's on the table.....and the conservative American Enterprise Institute saying it is not appropriate for use with Social Security.

From Andrew Biggs, AEI in 2011.

Chain Weighted CPI Wrong for Social Security Benefits

Today Ezra Klein tweeted that this was a trick being used to cut Social Security and Medicare.

So Ezra's stance seems different now.

Over at the Washington Post, Ezra Klein argues that a change in the Consumer Price Index (CPI) could make for better policy and better politics in helping address the budget deficit. Klein isn’t alone in his view, and I’ll admit that my dissent is a minority, but I think I’ve got a good point.

The CPI is used to adjust Social Security and other federal benefits, as well as to increase the dollar values assigned to income tax brackets. Klein and others propose shifting federal policy from the conventional CPI to the so-called chain weighted CPI, which better measures how consumers shift between competing products as prices change.

I have no disagreement that, in general, the chain weighted CPI is a superior measure of inflation to the standard CPI-W used to calculate COLAs or the CPI-U used to index the income tax brackets. However, the chained CPI is the wrong measure for Social Security benefits and the income tax code. A better measure for Social Security would be a chain weighted version of the CPI-E, which measures price changes for individuals over 65. This probably would still show lower inflation than the current CPI, by around 0.1 percentage point annually, but would be superior to the current CPI-W, the chained CPI, or the CPI-E on its own (which tends to show higher inflation).

The chained CPI is also inappropriate for use in the tax code. By lowering adjustments to the tax brackets, over time it would make more of individuals’ earnings subject to higher tax rates, an effect known as “bracket creep.” Even using the current CPI, and assuming that the Bush tax cuts were made permanent, average tax rates and tax revenues relative to the economy would soon rise to record levels, according to the Congressional Budget Office (CBO).

No wonder the average person like me is having trouble understanding what is going on.

Here's more from Ezra Klein yesterday in the WP

But no one ever considers that. The only reason we’re considering moving to chained-CPI because it saves money, and it saves money by cutting Social Security benefits and raising taxes, and it’s a much more regressive approach to cutting Social Security benefits and raising taxes than some of the other options on the table.

The question worth asking, then, is if we want to cut Social Security benefits, why are we talking about chained-CPI, rather than some other approach to cutting benefits that’s perhaps more equitable? The answer is that chained-CPI’s role in correcting inflation measurement error is helpful in distracting people from its role in cutting Social Security benefits.

The trick Washington is using to cut Social Security and Medicare