Tuesday, December 18, 2012

Chained CPI for Nothing is a Bad Deal

Thinking a bit more about the proposed fiscal cliff deal, Kevin Drum is right. switching Social Security COLA increases from CPI to Chained CPI in exchange for no additional improvement in Social Security financing is a sucker's move.

The backstory goes something like this: Social Security isn't quite in actuarial balance. Current payroll tax revenues don't raise enough money to cover current benefits. There's a decent chance that within the next 30 years, the trust fund will be exhausted. It's not guaranteed, as it's very hard to project the immigration rate, income distribution, and productivity growth over such a long time span. But there's a good chance it will happen. When that happens, if we do nothing, there will be an immediate cut in Social Security benefits of about 25%. So something ... well, nothing has to be done, but prudence suggests that doing something is in fact a little better than nothing.

And bringing Social Security back into actuarial balance isn't that hard. A mix of small benefit cuts and small tax increases get you there. Drum's favorite proposal is to (1)  raise the payroll tax cap from it's current $110,000 to $200,000 so that it once again covers 90% of income and (b) switch from CPI to chained-CPI for benefits. There are other proposals, such as raising the retirement age but only for high income earners to reflect the fact life expectancy has increased only for those at the top of the income distribution. But anyway, that's the gist of things. A bit more revenue, a bit less spending. It's not rocket science.

But the deal right now suggests cutting Social Security spending without bringing in more Social Security revenue. That's a dumb move and it shouldn't be made.

Elsewhere, I also note that there have been no noises about the sources of various unspecified cuts. If you're going to cut $120 billion a year and it's all in non-defense spending, that's pretty harsh. But if the cuts are split between Medicare, Medicaid, defense, and the rest of the budget, then maybe, just maybe, it's bearable. Right now no one is talking about defense cuts, but hopefully they're still on the table.

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