According to CNN, one of the sticking points to resolving the fiscal cliff “crisis” is the “poison pill” – better known as the “chained CPI,” to adjust future benefit payouts in response to continued price inflation caused by the Federal Reserve. It’s a simple case of apples and oranges:
The idea behind this is how consumers respond to price increases- for example, if the price of Granny Smith apples goes up, consumers may decide to purchase more Red Delicious Apples; this is accounted for in the current CPI measurements.
However, if consumers respond to the price increase of Granny Smith apples by purchasing fewer apples and instead purchase more oranges, thereby changing the “basket of goods”, this is not accounted for in the traditional CPI, but is in the Chained CPI. This is because the CPI-W and CPI-U use a fixed basket of goods.
Such a change in consumer behavior will also reduce the amount Social Security checks are adjusted for inflation, thus saving some money and reducing expected payouts, which the Democrats hate. This from CNN:
Using what’s known as “chained CPI” would change the way Social Security benefits are adjusted for inflation, meaning that future Social Security recipients would receive less money over time. Democrats consider this prospect a “poison pill”…
But Obama is willing to “compromise” in order to pacify Republicans:
In pursuit of strengthening Social Security for the long term, I’m willing to make those decisions. What I’m not willing to do is to have the entire burden of deficit reduction rest on the shoulders of seniors…
Social Security is broke. It is already eating up its meager reserves. It’s just a matter of time. But politics continues to override any considerations of such reality.
Says economist Lawrence Kotlikoff:
[Social Security] needs a 31 percent immediate and permanent increase in annual revenues to pay, over time, all of Social Security’s promised benefits. That’s close to a 4 percentage-point payroll tax hike!
Kotlikoff wants to keep Social Security. I don’t. Politicians in Washington want to keep it. But they aren’t interested in any conversation about how to keep it afloat. They just want to jiggle the numbers a little bit – just enough to get a “deal done” on the fiscal cliff. It guarantees that Social Security will go broke. The checks will stop. The conversation about “poison pills” and “chained CPI” will then be very much different.