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President Barack Obama and lawmakers are considering cutting Social Security and increasing revenue by changing the way the government measures inflation.

Four senior congressional aides said lawmakers are discussing using an alternative yardstick to gauge inflation, known as the “chained consumer price index,” to determine annual cost-of-living adjustments for millions of Americans.

The idea may rile both Democrats and Republicans, because it could mean paring Social Security by $112 billion over 10 years, raising taxes by $60 billion and cutting pension and veterans’ disability payments by $24 billion, according to estimates by the nonpartisan Congressional Budget Office and the Joint Committee on Taxation.

Advocates say the change is needed because the government’s current measure of inflation overstates how quickly prices rise.

“There hasn’t been any economist anywhere that says we shouldn’t do that,” said Senator Tom Coburn, an Oklahoma Republican who was one of the so-called Gang of Six lawmakers that tried to develop a long-term debt plan. “We need a CPI that truly reflects what’s happening in the economy, not what’s good for the politicians.”

The idea, which was discussed both as part of a series of debt talks led by Vice President Joe Biden and by the Gang of Six, resurfaced yesterday during a meeting between Treasury Secretary Timothy Geithner and House Democrats, according to a congressional aide. Democrats pressed Geithner on the issue and he didn’t rule it out, according to the aide.
Meeting Today

Obama met today with congressional leaders as they push to hash out a deficit-reduction plan that would ease passage of a debt-limit increase by an Aug. 2 deadline. Obama called the meeting “constructive” and “frank,” though he said they remain “far apart on a wide range of issues.”

The president said aides would work through the weekend and lawmakers would reconvene on July 10 so “the parties will at least know where each other’s bottom lines are and will hopefully be in a position to then start engaging in the hard bargaining that’s necessary.”

Representative Xavier Becerra, speaking on C-Span today, said the chained index proposal may be an Obama negotiating tactic. “He has tried many ways to get our Republican colleagues to come to some middle ground and hasn’t succeeded,” said Becerra, a California Democrat who opposes benefit cuts. “I suspect he’s saying, ‘Look I’ll put everything on the table, let’s see what sticks.’”
‘Zero Appetite’

Representative Jared Polis, a Colorado Democrat, said “there is a zero appetite in the Democratic caucus for looking at entitlement programs unless there is substantial revenue on the table.”

White House spokesman Jay Carney downplayed the significance of any changes in Social Security, saying in a statement: “The president has always said that while Social Security is not a major driver of the deficit, we do need to strengthen the program.” He said Obama wants to work with both parties to do that “in a balanced way that preserves the promise of the program and doesn’t slash benefits.”

Social Security and other government benefits along with much of the tax code are automatically adjusted for inflation so Americans don’t fall behind as prices rise. Yet economists say the government’s inflation measure exaggerates how quickly prices increase, which means it’s paying too much for annual cost-of-living gains while collecting too little tax revenue.
Cutting Benefits

Democrats such as Representative Jan Schakowsky of Illinois say the alternative index, which she called the “chainsaw CPI,” would mean cuts in Social Security benefits. Over 10 years, using the alternative index would reduce projected Social Security spending by 1.2 percent, according to the Congressional Budget Office.

Schakowsky said the current inflation measure already understates the cost-of-living increases facing seniors because they spend more on medical care than the average American.

“Seniors get the double whammy -- higher health-care costs and deeper benefit cuts,” she said.

Even Democrats like Senator Ben Nelson of Nebraska, who’s often voted with Republicans, rejected the idea. “At some point we have to look at Social Security, but that’s not part of this process,” he said today.

A. Barry Rand, head of the AARP, the advocacy group for the elderly, said: “Reducing the COLA by even a small amount is a harmful cut for many retirees.”
Stealth Tax Increase

Grover Norquist, head of the anti-tax Americans for Tax Reform, called the idea “effort number 27” to dress up a tax increase in the guise of good government.

“This is one of those things invented by people who are trying to raise taxes and pretend they’re not,” he said. “If you change the law to get more money, that’s a tax increase -- doesn’t matter how you do it or what you call it.”

Senator John Thune, a South Dakota Republican, said he supports applying the chained index to benefits programs, though not to taxes.

“Taxes are entirely different,” said Thune. “That would be a license to steal for the federal government if you just locked in tax increases every year based on what some index is.”

Representative Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, released a study yesterday that said the tax increases would hurt the middle class.
Technical Change

Advocates say switching index measures would be a technical change, not a tax increase.

“I don’t see how anybody can argue against having accurate formulas,” said Senator Mike Crapo, an Idaho Republican who was a member of the Gang of Six.

Coburn said the Gang of Six agreed on the chained index before he dropped out of the negotiations in a separate dispute. Another group of lawmakers led by Biden was debating the idea before their talks fell apart, said Senate Finance Committee Chairman Max Baucus, a Montana Democrat and a participant in that group.

Inflation is a general rise in the price of goods and services, and the government measures it by surveying thousands of Americans on what they buy and where they shop.

The Bureau of Labor Statistics each month sends 400 price collectors to 26,000 stores in 87 cities to record the prices of breakfast cereals, bus tickets, haircuts, toys, funerals, dental fillings, jewelry and 80,000 other products and services. It uses that information to devise a basket of goods the typical family buys each month in order to track prices.
Missing Consumer Response

There is a “pretty widely held” consensus among economists that the bureau’s methodology exaggerates inflation because it doesn’t fully account for how individuals respond to rising prices, said Mark Zandi, chief economist of Moody’s Analytics.

It accounts for those who buy cheaper brands of wine or steak when those prices rise, though not for those who opt instead for beer or chicken. That means it overestimates inflation, which leads to cost-of-living increases for Social Security beneficiaries, veterans and federal retirees that are bigger than necessary to maintain their purchasing power. It also affects the number of Americans who qualify for food stamps and other aid to the poor with eligibility criteria tied to federal poverty guidelines.

It means the thresholds at which higher income tax rates begin to apply to individual taxpayers rise faster than necessary to prevent so-called “bracket creep,” which means less tax revenue pouring into the Treasury.

The chained index accounts for the belt-tightening chicken eaters and beer drinkers. Over the past decade, the alternative index has grown more slowly than the current inflation measure by an average 0.3 percentage points a year, the CBO says.

“It’s a no-brainer,” said Marc Goldwein, former associate director of the administration’s deficit commission. “We’re measuring inflation wrong now and it’s obvious we should measure it right -- especially if it’s going to reduce the deficit.”

© Copyright 2011 Bloomberg News. All rights reserved.

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