More Cliff Notes–Moving to the Chained CPI or Raising Medicare Eligibility Age: Now’s Not the Time

December 9th, 2012 at 6:56 pm

Cutting right to the chase, the cliff is almost upon us, and deciding big changes in social insurance programs—Medicare and Social Security, in particular—in this climate makes no sense.   That includes both raising the Medicare eligibility age and the move to a chained CPI, which by dint of growing more slowly, would reduce Social Security benefits (and increase tax revenues…see here).

–That doesn’t mean some changes, including cuts, shouldn’t be part of the cliff negotiations.  The President’s team, I think, could bring to the table around $400 billion in Medicare cuts over 10 years that largely come out of more efficient drug purchasing, other delivery side savings (paying for quality over quantity), and increase premiums on higher income seniors.  Those look to me like smart savings and important negotiating material.

–But bigger, structural changes, like raising the Medicare eligibility age or switching to the chained CPI are more complex and deserve more discussion and debate.

–Increasing the eligibility age for Medicare saves money for the budget.  But that’s no great policy feat–just kick some people off the rolls and boom, you’ve got some savings.   In fact, it raises costs for the larger system (see here), while potentially leaving 65-66 year olds with a less access to affordable coverage.  That’s not “reform”—it’s a short-sighted attack on a critical, highly efficient program motivated not by efficiency, but by antipathy to social insurance.

–The chained CPI switch makes more substantive sense, but it’s by no means a simple call.  It’s a more accurate price index, but it would constitute a benefit cut, and one that would really accumulate for older seniors.  For this reason, my CBPP colleagues (see first link above) argue for a benefit bump-up in the program for the older elderly.  I think it’s very unlikely that we can make that part of the negotiations over the next few weeks.  If there’s a part two to all of this that involves real tax and entitlement reform discussions next year, that’s the time to be getting into such significant structural changes.

–Some advocates for retirees have suggested that if the goal is to switch Social Security to a more accurate price index, we should consider the CPI-E (“E” is for an experimental  index for the elderly).  This makes sense because the elderly really do face a different consumption market basket than the rest of us, with larger expenditure shares on medical care and housing, and less on, say, work-related costs, like transportation (see figure below).

–The problem is that the ‘E’ index is not computed as accurately as it should be, but the BLS could whip it into shape if Congress would provide the resources (I don’t know how much, but a) we’re talking millions not billions, and b) it would pay for itself pretty quickly—the main problem is the sample of goods and their weights are not representative of the elderly’s expenditures).

–So, a smart way to go here is to pay the BLS to derive a more accurate price index for the elderly and then chain weight it.

Then, when we’re not under the pressure of a cliff-like deadline, we can consider whether some of these policy changes make sense.  To do so over the next couple of weeks would be extremely misguided with potentially large and long-term negative consequences.

Source: Stewart, 2008

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4 comments in reply to "More Cliff Notes–Moving to the Chained CPI or Raising Medicare Eligibility Age: Now’s Not the Time"

  1. Fred Donaldson says:

    Thank you for some common sense fair proposals, and let us hope these can be placed in stone and not used as bargaining chips for the further destruction of a retirement system that pays about 60% of what we see in other countries, and the rape of a health system that already costs Medicare folks thousands of dollars in mandated premiums, supplemental insurance and co-pays.

    No other country in the world, including dictatorships, has so little respect for the worker and the elderly. Is this what they teach at the elite schools or is it an “acquired taste” at academic meeting populated by too many conservative (corporate-financed) think tanks?

    This is government for the people, not for the milking of the people, and not for the increase of wealth in a few pockets, but for the general public weal.

  2. wendy beck says:

    Like Fred Donaldson above I, too, thank you for your reasonable and humane ideas on the budget. The chained CPI was one of the major sticking points in my group of library friends who studied the Simpson-Bowles suggestions. I would like to see more work on the CPI-E for fairness to the elderly.

  3. Monique Morrissey says:

    Hi Jared–
    Given CBPP’s stance on chaining, we didn’t even ask if you would sign our experts/economists statement against the chained CPI-U, but now I wish we had!

  4. coberly says:

    well, none of this makes sense.

    Social Security contributes nothing to the deficit. No cuts are needed. The workers pay for their own SS. If they want to increase their benefits to cover the longer retirement implied by longer life expectancy it would cost them an extra eighty cents per week each year… while their wages are going up eight dollars per week each year.

    there is no point in “more accurate” cpi. The workers are paying for their own benefits.. if they want more when they retire, they can get it by paying more (really saving more) through the payroll tax. And if they want to retire at 65 (say) instead of working until they can’t, who are “we” to stop them if they pay for it themselves?

    Medicare would work out very similarly if we hadn’t turned it partly into welfare in a misguided attempt to save the workers a few dollars a month while they have the money, and cut Medicare to “balance the budget”, forcing those workers to have to scramble to find the money to pay what Medicare no longer covers.

    There is a need for welfare, but it’s pretty stupid to use welfare when the people can pay for their own needs, using the government to manage pay as you go insurance.