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A Mind Blowing Experience?

Saturday April 6th, 2013   •   Posted by Craig Eyermann at 10:10am PDT   •  

It’s coming! Finally! And according to White House press secretary Jay Carney, it will be mind-blowing!

The Arizona Daily Star summarizes the basics of we know so far of the budget proposal that President Obama will release more than two months behind the schedule set by law on Wednesday, April 10th:

The plan, if ever enacted, could touch almost all Americans. The rich would see tax increases, the poor and the elderly would get smaller annual increases in their benefits, and middle-income taxpayers would slip into higher tax brackets despite Obama’s repeated vows not to add to the tax burden of the middle class.

His proposed changes, once phased in, would mean a cut in Social Security benefits of nearly $1,000 a year for an average 85-year-old, smaller cuts for younger retirees.

Less than a day later, President Obama is already beginning to distance himself from his budget proposal, as reported by the Washington Post.

WASHINGTON — Confronting bipartisan criticism, President Barack Obama conceded Saturday his proposed budget is not his “ideal plan” but said it offers “tough reforms” to the nation’s benefit programs while closing loopholes for the wealthy, a mix that he argued will provide long-term deficit reduction without harming the economy.


Obama’s plan has two central features — $580 billion in new taxes that Republicans oppose and a new inflation formula, rejected by many liberals, that would reduce the annual cost of living adjustments for a broad swath of government programs, including Social Security and benefits for veterans.

The “new inflation formula” being referred to is what’s known as the “chained Consumer Price Index” (chained-CPI), which many economists argue better captures the actual reduction in the buying power of the U.S. dollar over time than the regular Consumer Price Index (CPI), which they argue overstates the actual amount of inflation in the U.S economy by a small, but consistent margin.

MSNBC has a surprisingly good overview of how the change in the formula that the government uses to adjust for the effect of inflation on everything ranging from how income tax brackets are changed each year to the annual adjustments Medicare and Social Security benefits. Here is the example they provide for how an individual’s Social Security benefits would be affected:

Let’s say your monthly Social Security check last year was $2,000. Using the CPI, the Social Security Administration found that the cost of living adjustment for this year was 1.7 percent. To calculate your new social security check, you take last year’s check and multiply it by your cost of living adjustment (COLA) for this year. You then add the result to last year’s check to get the new number. So here we go: 2,000 x .017 = 34. Using the CPI, your monthly Social Security check would have increased from $2,000 to $2,034.

Using the chained CPI, your COLA comes out to .3 percentage points lower–so instead of 1.7 percent, it’s now 1.4. 2,000 X .014 = 28. Your monthly Social Security check is now $2,028–$72 less a year than you would be getting using the plain CPI formula. Sounds tiny? The switch could save $130 billion.

The $130 billion figure is the result of spreading this relatively small dollar reduction in the increase in an individual’s benefit reduction among the projected number of all Social Security beneficiaries over a 10 year period of time.

The effect over time is an important one to understand for why this approach is being considered. Here, at the 1.7% rate of inflation given by the regular CPI, the individual’s monthly Social Security benefit from MSNBC’s example would double in dollar value from $2,000 to $4,000 after approximately 42 years. At the 1.4% rate of inflation given by the chained-CPI, the individual’s monthly Social Security benefit would be $3,587 after 42 years, about 12% less than it would be using the regular CPI adjustment. Doubling the dollar value of the Social Security benefit would take an additional 9 years at the lower chained-CPI rate.

Multiplied by the number of all beneficiaries over all those years, and suddenly, we’re talking about a massive reduction in the amount of federal government spending over time.

The reform is being strongly opposed by the American Association of Retired Persons (AARP), the politically-active organization that derives approximately two-thirds of its revenue from insurance products purchased with the discretionary incomes of elderly Americans – especially those whose main source of income is Social Security. The President’s proposed change threatens to more than offset what the organization expects to gain financially from the passage of the Patient Protection and Affordable Care Act (a.k.a. “Obamacare”), which the AARP actively supported.

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April 2013