As the Congressional super committee searches for common ground on the federal budget, one idea is getting more and more notice. The lawmakers are considering a tweak to the formula the government uses to estimate the annual increase in the cost of living. While it sounds like a technical change only budget wonks would notice, it would affect nearly every American, sometimes to the tune of hundreds of dollars in increased taxes and decreased Social Security payments if put into place. And because it includes a mix of entitlement cuts and increased revenue, it's an idea which both Republicans and Democrats on the committee have supported—though with some heavy reservations.
The government currently uses the Bureau of Labor Statistics' consumer price index to determine cost-of-living increases for Social Security benefits, and also to adjust income tax brackets upwards each year. But many economists have been urging the government to switch to the so-called chained CPI, which tries to better take into account changes that consumers make in the face of higher prices. If you like apples but the price gets too high, you might try bananas and contain your overall grocery costs, even though you're not getting the exact food you want. The chained CPI would take into account those adjustments, and on average the difference lowers the annual rate of price increases by about 0.3 percent.
By "chaining" the CPI, the government would pay out less in Social Security payments each year than it otherwise would, and most Americans would see slightly increased taxes as their incomes increase faster than the income tax brackets rise. At first, it would hardly be noticeable, but over time it could make a difference of hundreds of dollars. Overall, it would save the government at least $200 billion over the next decade.
Both the Republicans and the Democrats unveiled their proposals to super committee members last week, and according to a Congressional aide, the cost-of-living tweak was in both plans. But because the adjustment would cut more money from Social Security than it would raise from tax hikes, Democrats consider it to be a major concession, something they would only agree to if the GOP is also willing to compromise on other issues, the aide says. For the parties, this is one of the few areas where they are able to find common ground. The move could be billed as a technical adjustment, rather than a tax hike, allowing the GOP to maintain that they haven't broken their promise not to raise taxes. And the mix of new revenues and entitlement changes is along the lines of the "balanced deal" Democrats have long been advocating.
But it's still a controversial idea. Any cuts to the social safety net or tax increases are sure to draw fire, no matter how small. The retiree advocacy group AARP has opposed using it as a way to cut the deficit. Democrats outside the super committee have also blasted it. Staffers for Michigan Rep. Sander Levin, the ranking Democrat on the House Ways and Means Committee, circulated studies last week showing that the chained CPI could cost a new retiree as much as $560 per year by the time he or she is 75 years old.
The chained CPI would also raise taxes, although not in the top-heavy way tilted towards millionaire and billionaires that Democrats favor. In fact, because it would affect how all of the tax brackets are affected, it would affect 73 percent of income earners by 2021, according to the non-partisan Tax Policy Center. The group also estimates that it would be felt by taxpayers of all incomes, with those making between $30,000 and $40,000 seeing the biggest percentage tax increase, at 0.3 percent. The study showed that in the year 2021—which the center uses as an example to measure how the increase would build up over time—a taxpayer in that range would see pay about $135 more than they would otherwise.
The super committee must find at least $1.2 trillion in deficit savings by the end of the month, or automatic, across-the-board cuts are triggered. As the day grows nearer, both sides are grasping for areas of compromise, though that raises the likelihood their choices will leave some key constituencies angry.
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