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'Chained CPI' hurts seniors
Registered nurse JoAnn Brand (L) examines Sham Tavakoli at the Lifelong Medical Marin Adult Day Health Care Center on February 10, 2011 in Novato, Calif.
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President Obama released a budget proposal today that among other things calls for reducing Social Security payments by using a formula to calculate inflation that's stingier than the current one. It's called the "chained" Consumer Price Index. The idea is that when the price of certain goods goes up, consumers typically switch to lower-cost substitutes. If the price of steak rises, they switch to hamburger. But not everything has an easy "down market" replacement. Take health care for seniors.
Under the president's plan, we could save more than $100 billion on Social Security over the next 10 years by using this lower measure of inflation.
The problem is the elderly spend a much larger share of their incomes on health care than the rest of us. When prices go up on some aspects of health care, cheaper substitutes may not be available or as effective. If doctors order a particular test or procedure, most patients, particularly the elderly, are not going to argue in the first place.
The cost of health care has been rising faster than inflation. And because seniors need more of it, even Social Security's current inflation adjustment may understate the true impact of inflation on them.
Social Security benefits are already meager for most recipients. The median income of Americans over 65 is under $20,000 a year, and most depend on Social Security for more than half it. The average Social Security benefit is less than $15,000 a year.
Besides, Social Security doesn't contribute to the budget deficit and it's not in serious trouble. Its trust fund is flush for at least two decades.
If we want to ensure its solvency beyond that, we don't have to hurt beneficiaries. We could raise the cap on income subject to Social Security taxes, now $113,700. Or fully tax the payout for wealthy beneficiaries.
Why is the president even suggesting the chained CPI for Social Security? Republicans aren't asking for it. Not even Paul Ryan's draconian budget includes it. Democrats invented Social Security and have been protecting it for almost 80 years. They shouldn't be leading the charge against it.
Prof. Reich's outlook on Social Security's solvency is overly optimistic. The Social Security Disability trust fund is close to empty, expected to run out in the next few years. After that, either the disabled stop getting checks, or the retirement fund will get raided to pay for disability benefits, bringing the date for when the retirement fund runs empty much sooner than 2 decades from now.
He correctly highlights how our current medical system cost inflation is eating us alive. And no, Obamacare isn't going to change this. Instead of fixing the problem of cost inflation in our broken health care system, his suggestion is to raise taxes to pay for the rising cost of medical benefits. This would only incentivize more cost inflation in the medical system.
