Friday, August 31, 2018

The Chained CPI: Fuzzy math and your pocketbook

We have, for as long as I’ve been around, a federal government that has a spending problem and because of that it has a revenue problem, too.

So what is a government to do? Congress could openly raise taxes and cut benefits. That’s political suicide, as a spendthrift would be a marked man as would his pennywise foil.

So, those tasks need to be done secretly. There is no more clandestine of a way to do that than to manipulate the statistics that govern our public policy.

One of those newfound gimmicks is the Chained Consumer Price Index (CPI). The GOP Congress attached it to federal tax reform last year, applying its use to personal and corporate taxes for the first time ever. Now that it’s no longer taboo, there’s talk of applying it to Social Security as well, something the Obama Administration toyed with in 2013 and 2014.

In the old CPI method, the cost of a fixed basket of goods and services was tracked over time and that growth in value represented the inflation rate. The Chained CPI takes that simple, straightforward calculation and turn it on its head, making it subjective and something of a fantasy.

In the new method federal economists adjust the basket for assumed changes in buying behavior; no longer is it a designated collection of items. In their eyes, if a shopper won’t buy a beef roast because it went up X dollars, he would probably buy a replacement meat, like pork chops. So, the Chained CPI adjusts for the modified basket, as theoretical as it may be, and tracks the price of the chops, noting their price variance instead of the roast that used to be in its place.

Since the modified basket will feature lower-priced replacements, the Chained CPI will produce an inflation rate that is lower than the standard CPI. On average, it will cut the accepted inflation rate by a third of a percentage point per year. It doesn’t seem like much, but it is. Inflation was pegged at 2.5 percent for 2017. The Chained CPI brings that number down to 2.2 percent. That works out to be a 12 percent difference.

That change will yield big results for Washington. It’s been said that over the first decade alone, a fully-integrated Chained CPI (one applied to both revenues and expenses) would shrink the deficit by nearly $345 billion, through a combination of $125 billion in new tax revenues and $220 billion in spending cuts.

The new revenues will be achieved by sticking it to those who pay income taxes. Since wages will in many cases -- especially in a good economy -- rise at a rate greater than what will be a much smaller inflation rate, more people will jump into higher tax brackets – more quickly, too - since those brackets are continually adjusted for inflation. At the same time, personal tax loopholes will grow at an equally smaller rate, preventing people from deducting higher dollar amounts that would have tracked the CPI previously in place. We’re not talking peanuts: According to federal studies published a few years back, over the first 10 years of a Chained CPI the tax burden for a lower-income family will be 15 percent higher.

If the chained CPI is extended to Social Security in the coming years, the feds will see significant cost savings gleaned from those who rely on the government for a retirement income.

Social Security beneficiaries count on their benefits growing at a rate in step with inflation. In recent years the calculated rate of inflation has not been high enough to warrant a significant cost-of-living adjustment (COLA), if one at all. 2017’s COLA was 2 percent, the second highest over the last decade, and there were no COLAs for 2009, 2010, and 2015.

Seniors have been really feeling that. For 10 years now, their retirement income hasn’t been growing in step with what they’ve been seeing at the grocery store or, especially, in their property tax bills. Imagine that for the long haul, but worse. Under Chained CPI, someone collecting Social Security will receive $560 less per year after 10 years and almost $1,000 less per year after 20 years.

The weight of the Chained CPI will bring a good many people down – taxpayers and beneficiaries alike. It’s an unscientific manner to calculate one of our economy’s most important statistics and an easy way for Washington to earn and save money, without making the hard, important decisions that they should.

From the 03 September 2018 Greater Niagara Newspapers and Batavia Daily News

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