President Barack Obama##Q##s proposal to change the way the government measures inflation could lead to fewer people qualifying for college grants and anti-poverty programs, reduced benefits for seniors and veterans, and higher taxes for low-income families.
If adopted across the government, the new inflation measure would have far-reaching effects because so many programs are adjusted each year based on year-to-year changes in consumer prices.
Social Security recipients would get smaller benefit increases each year. The federal poverty level would rise by smaller amounts, meaning more people would technically rise out of poverty with only small increases in income.
Taxes would go up because of smaller adjustments to income tax brackets, the standard deduction and the personal exemption amount.
In all, the change would reduce the federal budget deficit by a total of $340 billion over the next decade, according to congressional estimates. However, the White House has said it wants the adjustments to include protections for “vulnerable” recipients, so the savings could be less.
Obama is proposing the new measure of inflation as part of his 2014 budget plan, which is scheduled for release on Wednesday. Obama has already agreed to adopt it twice as part of negotiations with congressional Republicans over reducing government borrowing. Neither of those talks produced an agreement.
Called the Chained Consumer Price Index, the new measure would show a lower level of inflation than the more widely used Consumer Price Index.
The chained CPI assumes that as prices rise, consumers turn to lower-cost alternatives, reducing the amount of inflation they experience. For example, if the price of beef increases while the price of pork does not, people will buy more pork rather than pay the higher beef prices.
The chained CPI is unpopular among many Democrats in Congress and advocates for seniors who complain that it would disproportionately hit low- and middle-income families.
“I am terribly disappointed and will do everything in my power to block President Obama##Q##s proposal to cut benefits for Social Security recipients,” said Sen. Bernie Sanders, a Vermont independent who caucuses with Democrats. “I also am especially concerned about the impact this change would have on disabled veterans and their survivors.”
AARP and other groups have been fighting for years against changing the way inflation is calculated. They argue that seniors don##Q##t have the same ability as younger people to buy alternative products, especially health care.
But the new inflation measure is popular among budget hawks in part because it cuts benefits and increases taxes gradually, in ways that might not be readily apparent to most Americans. The savings, however, become substantial over time.
Among the spending cuts over the next decade:
- Social Security: $127 billion.
- Federal retirement programs for military and civilian workers and Supplemental Security Income: $38 billion.
- Medicare and Medicaid: $29 billion.
On average, annual increases in Social Security payments, government pensions and veterans##Q## benefits would be about 0.3 percentage points smaller each year, according to the chief actuary for the Social Security Administration.
The COLA for 2013 was 1.7 percent or about $21 a month for the average Social Security retiree. If the new measure of inflation were in effect, the COLA would have been about 1.4 percent, or a little more than $17 a month. That##Q##s $4 less than the current system or about $48 less during the course of a year.
Once the change is fully phased in, Social Security benefits for a typical middle-income 65-year-old would be about $136 less a year, according to an analysis of Social Security data. At age 75, annual benefits under the new index would be $560 less. At 85, the cut would be $984 a year.
The tax increases would start off small, too, but would add up to $142 billion over the next decade, according the Joint Committee on Taxation, the official scorekeeper for Congress.
After 10 years, taxpayers making between $10,000 and $20,000 would see a 14.5 percent increase in their federal taxes with a chained CPI, according to a 2011 analysis. Those making between $30,000 and $40,000 would see a 1.4 percent increase while taxpayers making more than $1 million would get a tax increase of 0.1 percent.
Low-income taxpayers would see the biggest increase because much of their income is not currently subject to the federal income tax. Smaller annual adjustments to the tax brackets would push more of their income into the 10 percent tax bracket.
The wealthiest taxpayers wouldn##Q##t feel it as much because most of their income is already taxed at the top rate.