The Big Progressive Win In Obama’s New Budget

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In his upcoming budget proposal, the White House says President Obama will not be including a complicated but controversial measure that would have reduced Social Security benefits and spending on other programs while raising taxes.

The measure, known as chained CPI (short for consumer price index), would change the way benefits are calculated. They currently increase based on inflation, but there is more than one way to measure inflation. Using the chained CPI measure is meant to take into account consumers’ decisions to swap cheaper goods for ones that experience price increases. It was projected to save $127 billion in spending on Social Security over the next decade and reduce the deficit by $340 billion.

But the problem for Social Security benefits is that the elderly who rely on them are not usually able to buy cheaper products, given that they spend a much larger share of their income on health care and may be limited by their mobility in making other substitutions.

Using chained CPI would mean, for them, a reduction in benefits that increased over time, starting at about a 0.3 loss at first, which would become 3 percent 10 years out and 9 percent 30 years out. That translates into a significant amount of money, costing the average person who retires at age 65 about $658 a year, $1,147 by the time she reaches age 85, and $28,000 by the age of 95. The monthly reduction at age 80 is about the same as a week’s worth of food for a single elderly person. Many of the plans that considered switching to this measure for calculating benefits, such as President Obama’s past budgets and the Simpson-Bowles deficit reduction proposal, promised to include measures to ease the blow, such as an increase in benefits in the 20th year, but it still wouldn’t make up for the reduction.

This decrease in benefits would also particularly impact women, who tend to live longer and experience more poverty compared to men. Social Security is virtually the only source of income for nearly 40 percent of women over the age of 80, compared to just 28 percent of men.

The cut would also come at a time when fewer and fewer Americans have money saved for retirement. American workers are more than $6 trillion short of what they will need to save in order to maintain their standard of living after they stop working. The typical household has no savings in a retirement account at all, and those who do have money put away in a 401(k) tend to be the wealthiest. This looming crisis retirement has led some lawmakers, such as Sen. Elizabeth Warren (D-MA), to suggest we need to expand Social Security, rather than reduce it.

The switch to chained CPI would have other repercussions, such as increasing taxes. While most families would only see their tax bill go up by about $100, the biggest impact would be felt by families making between $30,000 and $40,000 a year.

Chained CPI will still be “on the table,” according to the administration, even if it is dropped in his budget. The rest of his proposal would completely erase remaining sequestration budget cuts by adding $56 billion evenly split between defense and non-defense spending, expand the Earned Income Tax Credit, and pay for these increases with a mix of spending cuts and closing tax loopholes, although White House officials did not specify what those would look like.