The unkindest cut

If news reports are accurate, the worst part of the tentative budget deal reportedly being hashed out between President Obama and House Speaker John Boehner is a proposed cut in the cost-of-living adjustment (COLA) for Social Security. This is a travesty, not least because Social Security is required by law to operate in long-term balance and therefore does not belong in budget talks ostensibly aimed at reducing long-term budget deficits.

We at EPI and our allies in the Strengthen Social Security coalition have written at length about the downsides of a COLA cut. It would have the biggest impact on the oldest retirees, who are often the poorest retirees. It would disproportionately affect disabled beneficiaries, including veterans, many of whom will see the cut cumulate over decades. And it would break the pledge made by many would-be Social Security reformers to shield current retirees, who cannot retroactively save more for retirement.

Let no one be fooled by the pretense that this is a technical adjustment. If COLA cut advocates truly believed that the chain index was more accurate (and the current measure inappropriately provided a real benefit increase over time), there would be no talk of a “birthday bump” to temporarily offset the cut after 20 years.

A lower “chained” COLA is supposed to better account for consumers’ ability to substitute cheaper goods and services in response to price increases. But Social Security beneficiaries spend a greater share of their incomes on necessities such as rent and utilities, so it is not even clear that the current measure understates the ability of beneficiaries to make such adjustments.

Even if it does, it is unlikely that a chained measure that also accounted for beneficiaries’ greater spending on out-of-pocket medical expenses would produce cost savings. The Bureau of Labor Statistics produces an “experimental” index, the CPI-E, which roughly tracks the spending of elderly consumers and has risen faster than the current measure. But neither the current index nor the CPI-E are based on the actual spending patterns of Social Security beneficiaries. Along with some 300 other Ph.D. economists and social insurance experts, we think the Bureau of Labor Statistics should construct one. In the meantime, leave the COLA alone.