Getting Close?

The Chained CPI and Votes in the House

What is the chained CPI, and why do liberals seem to hate it?

You've read by now that Obama is offering to Boehner a deal that includes indexing Social Security benefits to the so-called chained consumer price index as opposed to the regular CPI. Without getting into how each measures inflation, which is beside the point for our purposes, the long and short of it is that indexing benefits to the chained CPI will reduce benefits as people get older, a cut on the order of 3 percent a year for people in their mid-80s.

That's not insignificant for a lot of people, so liberal groups are up in arms. Most elected Dems haven't taken a position yet. Dick Durbin said today it would be "a hard ask" for many Democratic senators. came out against any such deal. Paul Krugman is skeptical though not against.

The Center on Budget and Policy Priorities, an important group to many Democratic legislators, is supportive in theory though not yet specifically supporting this deal. Here's a little paper from last February from CBPP about circumstances under which a chained CPI might be acceptable. The authors list four conditions, one of which is providing a benefit "bump" to older Soc Sec recipients so that their benefits aren't reduced so much.

Another, and this is an interesting policy matter to me, is the idea that the chained CPI be used to calculate tax rates as well as benefits. That is to say. Our marginal tax rates kick in at certain income levels. For example, in 2011, the 25 percent rate kicked in for a married couple filing jointly at $69,000. That number goes up every year according to the regular CPI.

If it were pegged to the chained CPI, which rises more slowly--and that's why the chained CPI would reduce Soc Sec benefits, right, cuz it rises more slowly--then the tax rates changes would rise more slowly too. So instead of going (hypothetically) to $71,000 from $69,000, it would go to $70,000.

That would push more taxpayers into the higher rate, and it would do so regressively, because for really rich people, there's no higher rate to be pushed into, you follow? So it amounts to a tax increase, albeit a very small one, around .2 percent. So it brings in a little more revenue, and the CBPP wants that revenue to go straight to deficit reduction.

Well, we don't know all these details yet. I'm hanging fire on it until we do. Potentially promising, I'd say in rough terms. It's true the above is a lot for Democrats to give, but they'd be getting a lot, too--Republicans would be voting for a tax increase, there'd be a little stimulus, debt negotiations would be off the table for two years, and more. Another thing a lot of liberals are upset by would be the end of the payroll tax relief (currently down from 6.2 percent to 4.2 percent). Liberal wonks like this because the tax is regressive, but elected Democrats are tending to worry more about fully funding the Social Security Trust Fund. I can see their point.

Of course, if Obama and Boehner strike a deal along these lines, and I must say it's looking more likely than I'd have thought, then we commence the dance of how it gets 218 votes in the House. That is a fascinating subject. I will have more to say about it later in the week. It is going to be an all-time donnybrook, one of great games of chicken we've seen in Washington in recent history.