Chained CPI and the Battle Over Veterans’ Benefits

Posted by Jason Van Steenwyk

Veterans groups and elder advocacy organizations such as the AARP are lobbying overtime to protect their constituents from the long-term effects of a budget-saving measure designed to reduce the rate of increase of future Social Security benefits, retirement income and VA disability compensation. 

The United States Government, still smarting from a nasty recession and suffering the fiscal hangover effects of the so-called ‘Stimulus’ package, is looking for ways to rein in spending in order to preserve the long-term financial stability of Social Security. According to the Social Security Administration’s own actuaries, the program has enough in hand to pay planned benefits through approximately 2033 – after which time its portfolio of bonds will be exhausted. At that point, projected revenues coming into the program from payroll taxes would be sufficient to fund only about 75 percent of currently projected benefits. 

One proposed solution – which the President himself is said to favor – is to slow down the rate of growth in benefits by switching to a new method of accounting for inflation. Specifically, the President, and certain fiscal hawks would like to switch over to a Chained CPI measurement.

The Chained CPI is thought to be a more accurate measure of the true cost of living because it takes into account dynamic consumer reactions to changes in prices. Under current methodology, if the price of steak doubles but the price of chicken stays the same, the current measure simply assumes that the retiree or veteran will still buy the same amount of steak. The Chained CPI method, on the other hand, will assume that higher steak prices will result in less purchases of steak and more substitution of chicken.

The result, chained CPI advocates say, is a more accurate picture of the true cost of living, given that consumers are able to mitigate the effects of inflation by making smarter purchases.

It will also result in COLA adjustments being reduced by half. That means lower cost-of-living increases to Social Security recipients, veterans, and any other beneficiaries of programs affected by chained CPI methodology.

As a result, the Veterans of Foreign Wars has come out strongly against the measure, as has the American Association of Retired Persons.

According to a report issued in 2011 by a group called Strengthen Social Security, a switch to chained CPI would result in a relatively small decrease in planned benefits of less than 1 percent in the first year for a 65 year old veteran. But the reduction would become much more noticeable as he grows older: Benefits would be 9.2 percent lower than an unchained CPI would generate by the time the veteran turned 95 years old.

That’s a significant difference – both for the veteran and the taxpayer.

Moreover, a switch to chained CPI would most severely affect younger veterans, who will be reaching their retirement years decades away, or living on disability compensation payments for many decades to come. According to the same report, a disabled veteran who started receiving VA disability benefits at age 30 would have his or her benefits reduced by $1,376 at age 45, $1,821 at age 55 and $2,260 at age 65.

Reduction in VA Comp

 

 

 

 

 

 

 

 

 

 

 

 

A switch to chained CPI would also disproportionately affect women, who both live longer than men, on average, and rely on Social Security for a greater proportion of their retirement income than men. And finally, a broad switch to chained CPI would also doubly affect the young, since it would quickly result in a higher and higher tax burden. This is because the chained CPI would also reduce the annual adjustments to tax brackets every year, resulting in more and more money becoming taxable at higher tax brackets.

Ultimately, it’s up to Congress to reconcile the competing interest groups. Last week, the Senate expressed its opposition to transitioning to a chained CPI for veterans in a non-binding voice-vote. There was no roll call on the vote, so there is no real record of how your Senator voted. The measure’s sponsors were Senators Bernie Sanders (I-Vt.), Tom Harkin (D-Iowa), Mazie Hirono (D-Hawaii) and Sheldon Whitehouse (D-R.I.)

While early indications are that Senate liberals and Democrats generally oppose the adoption of chained CPI – as does the AFL-CIO, for that matter – the liberal-leaning Brookings Institution has come out in favor of considering chained CPI, and including veterans’ benefits in the equation:

“We are in an era where benefits are going to be reduced and revenues are going to rise,” said Isabel Sawhill, a Senior Fellow at the Brookings Institution, according to reporting by Federal News Radio. There’s just no way around that. We’re on an unsustainable fiscal course,” Sawhill said. “Dealing with it is going to be painful, and the American public has not yet accepted that. As long as every group keeps saying, ‘I need a carve-out, I need an exception,’ this is not going to work.”

Sawhill argued that making changes now will actually make it easier for veterans in the long run.

“The longer we wait to make these changes, the worse the hole we’ll be in and the more draconian the cuts will have to be,” she said. 

Nonsense. Veterans disability compensation, especially, needs to be carved out and protected from any move to a chained CPI, for the simple reason that these veterans have already sacrificed for the good of the Republic. In many cases, these veterans have had limbs carved off in the service of their country – something not generally true of most Social Security beneficiaries.

Social Security is a fundamentally different program than veterans’ benefits. First of all, its original design was to be self-supporting. Current benefits were to be paid by current workers. That was the deal all along. It is, at its core, an insurance program, and we are all policyholders. Because Social Security’s reach is so broad, there is no real way to ‘carve out’ segments of the population, because any decisions made for Social Security ultimately affect all of us.

This is not the case with veterans benefits. It is not a mutual aid program. It is not predicated on a veteran having paid into the system, and benefits were never meant to be actuarially driven. Any veteran who served, and some who were wounded or injured in the service to their country, did so under the understanding that they would qualify for disability compensation if they were wounded or injured in the line of duty, and that these benefits would increase with inflation.

As the Veterans of Foreign Wars points out in its own talking points memo on the issue, Chained CPI is based on changes in purchasing habits during poor economic times (buying hamburger instead of steak, renting a movie instead of going to the movies). However, military families and disabled veterans are often on fixed incomes and do not have the luxury of making these choices; they already buy hamburger and rent movies.

 

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