Budget Deal May Rely On Backdoor Social Security Cuts

Last Updated Jul 13, 2011 12:15 PM EDT

Cuts to the benefits paid in programs such as Social Security and Medicare are immensely unpopular with U.S. voters, so politicians have been doing all they can to avoid making clear proposals, or even talking about them at all. But there may be some adjustment going on behind the scenes that will cut benefits all the same, through changing the way the U.S. government calculates inflation, and therefore the amounts of the increases that are built into benefits through cost of living allowances (or COLAs).

The past few days have brought stories to the Wall Street Journal and the Financial Times, based on research by a group called the Moment of Truth Project (I'll refer to them as MOTP). It's hard to tell who these people are; the MOTP seems to be an effort of the Committee For A Responsible Budget, and I tried calling a spokesperson, but got someone else's voice mail. But they list some big hitters as members, such as former senator Alan Simpson.

From the MOTP's research:

Maintaining purchasing power in spending programs and indexing various parts of the tax code is an important policy goal. However, policymakers should ensure that the most accurate measure of inflation is being used. To correct the problem of over-indexation, many have proposed switching to the chained CPI to provide a more accurate measure of inflation for indexed provisions in the federal budget...
In addition to improving technical accuracy, switching to chained CPI would have the secondary benefit of reduce the deficit - by about $300 billion over the next decade alone.
Addressing our fiscal challenges will require many tough choices and policy changes - but switching to the chained CPI represents neither. Such a change offers policymakers the rare opportunity to achieve significant savings spread across the entire budget by making a technical improvement to existing policies. As such, across-the-board adoption of the chained CPI should be at the top of the list for any deficit reduction plan or down payment.
What this means is that benefits can be cut by monkeying with which of the many measures of inflation are applied to the COLA, and not ever coming out and saying that they are making cuts. Specifically there is talk of applying something called chained CPI, rather than the current headline CPI-U.

Consumer price inflation is a really complicated idea in a diverse economy like the U.S., and I imagine the "right" way to measure it changes over time, and in fact the methods are tinkered with all the time. But this sounds like politicians pulling a fast one in order to avoid facing the populace. (In my initial version of this post I had posited that this sort of change could be transmitted through to the accretion on the Treasury Inflation Protected Securities, but thanks to a helpful call from Mike Pond of Barclays Capital, one of the top analysts of the U.S. bond market, I know that is not right -- the prospectus on TIPS calls for paying the conventional CPI-U inflation rate, and shifting away from that would be akin to a default. So don't worry about your TIPS, at least not on this point.)

There is a group of government critics, or conspiracy theorists, or somewhere in between, called Shadow Government Statistics, who make a business out of reporting on this question. (Their tag line: "Have you ever wondered why the CPI, GDP and employment numbers run counter to your personal and business experiences? The problem lies in biased and often-manipulated government reporting.")

I haven't seen any proposals so far that directly tie the spending cuts under consideration now with low-balling inflation, but I'll let you know when I do.