Social Security Cuts: Tax Hikes Linked or No Deal
Policy + Politics

Social Security Cuts: Tax Hikes Linked or No Deal

iStockphoto/The Fiscal Times

President Obama may have put Social Security on the table in the debt ceiling talks that resume this afternoon, but its remaining there hinges on at least some Republicans agreeing to raise taxes through the same mechanism that the president would use to cut benefits for seniors.
The issue hinges on changing the government’s consumer price index (CPI) inflation-adjustment formulas, which affect not only the cost of living adjustment for the senior retirement program but a number of tax exclusions in the income tax code.  This will reduce the annual increases in the size of standard deductions; adjustments to tax brackets as incomes rise; the size of the annual gift tax exemption; and a host of tax credits, including the child tax credit.

Moving to a lower CPI adjustment factor known as chained CPI would cut the rate of increase of Social Security benefits by about 7 percent over the next decade – a savings of nearly $300 billion for the program. But it would simultaneously raise nearly $100 billion from increased taxes on nearly all Americans.

The president is losing support from a wide swath of his political base for putting Social Security on the table. “There’s no way to sugar coat a sneak attack on everyone’s COLA,” said Eric Kingston, co-director of Social Security Works, a coalition of several hundred progressive groups dedicated to preserving the program as is. “Money would be ripped out of the pockets of millions of vulnerable Americans. Social Security’s COLA should be increased, not cut.”

But some liberal Democrats have expressed willingness to include Social Security cuts as part of an overall package to raise the debt ceiling and reduce the nation’s long-term deficit. “I will look at it if it is part of a larger package,” Sen. Richard Durbin, D-Ill., told Bloomberg television on Thursday morning. “I want to look at it in the context of a larger agreement.”

Durbin was one of several Democrats who backed the Bowles-Simpson deficit reduction package last December, which called for using chained CPI to calculate future Social Security benefits. Chained CPI reduces inflation adjustments by assuming people switch to cheaper or smaller alternatives when the price of some goods rise significantly, such as cars or televisions.

But the switch would also generate significant new revenues through higher income taxes on most Americans. While that could be billed as a technical fix, conservative Republicans aligned with the Tea Party are certain to oppose such moves. Rep. Eric Cantor, R-Va., the House Republican leader, on Wednesday said any tax increases anywhere in the tax code, even by closing loopholes, must be revenue neutral, which as a practical matter means having them be offset by tax decreases elsewhere in the code.

The emerging political strategy for lifting the debt ceiling would require a centrist coalition of at least some Republicans in the House led by House Speaker John Boehner and most Democrats endorsing a deal that could reduce the nation’s long-term deficit by as much as $4 trillion over the next decade. That was the goal outlined in the Bowles-Simpson report last December, which called for $3 in spending cuts for every $1 in tax increases.

It’s unlikely that most Democrats would go along with such a plan. Sen. Kent Conrad, D-N.D., a member of the deficit commission and a staunch supporter of long-term debt reduction, on Wednesday called for a 50-50 split between spending cuts and tax increases to reduce the deficit and bring along more liberal members of his party.

More on the debt ceiling and Social Security from The Fiscal Times:
Obama Ups the Ante with Social Security, Medicare Cuts
10 Things you Need to Know about the Debt Ceiling
What Debt Ceiling?  Plan B is the 14th Amendment