Rep. Chris Van Hollen, D-Md., told "CNN Sunday" that there is a roadblock in the so-called chained Consumer Price Index issue. (Brendan Hoffman / Getty Images)
Federal retirees dodged a bullet this weekend, when Republican lawmakers backed off a demand to adopt a less generous measure of inflation as part of a fiscal cliff deal.
As part of their deficit-reduction proposal to avert the sequestration cuts, Republican negotiators proposed replacing the current cost-of-living adjustment calculation with a so-called chained Consumer Price Index. This would translate into lower COLAs for federal retirees’ pensions. That proposal almost scuttled the talks as Democrats dug in their heels Sunday to resist the chained CPI, which would also reduce the growth in Social Security benefits. Later that day, Republicans took it off the table.
“There was a big roadblock earlier today with the so-called chained CPI issue, but that seems to have been put aside,” Rep. Chris Van Hollen, D-Md., told “CNN Sunday.” “A little earlier today, I would have said that the odds of an agreement are very low because [Sen.] Mitch McConnell, the Republican leader, had put that into the talks. That apparently is no longer part of it.”
Sen. Olympia Snowe, R-Maine, told The Hill newspaper that cuts to Social Security are now off the table but will be reconsidered later in the year as part of raising the debt ceiling.
“It’s safe to say that chained CPI will not be a part of [the GOP’s] proposal,” Snowe told The Hill. “We’ll leave that for a later day.”
The chained CPI is usually 0.25 to 0.30 percentage points lower each year, on average, than the standard CPI measurements that are used to determine COLAs. Switching to a lower CPI at first would mean a few hundred dollars less per year for federal retirees. But its effect would compound over the years and decades until, eventually, some retirees would likely earn tens of thousands of dollars less than they would under the current method of setting COLAs.
Federal employee groups blasted the idea of switching to a chained CPI earlier this month, when reports surfaced that President Obama had agreed to Republican demands that it be adopted. The National Active and Retired Federal Employees Association sent lawmakers a letter that called it a faulty measure of inflation. NARFE said chained CPI does not account for seniors’ health care costs, and that a method of measuring CPI that includes health care costs would result in higher COLAs than the current method.
That is “perhaps a sign that moving to the chained CPI is going in the wrong direction,” NARFE wrote.
The Moment of Truth Project, which is co-chaired by former White House Chief of Staff Erskine Bowles and former Sen. Alan Simpson, said in a paper that the switch could save the government more than $290 billion over the next decade. Simpson and Bowles also pushed for a transition to the chained CPI in 2010, when they headed the White House’s deficit-reduction commission, saying it was a more accurate measure of inflation than the current system.
Critics of the government’s current method of setting inflationary rates say it does not account for changes in consumers’ buying habits as prices increase. For example, if apples become more expensive, most consumers will adjust by buying fewer apples or switching to a cheaper fruit. The chained CPI attempts to take those changes into account.
Chained CPI would also lower the COLAs for military pensions, Social Security benefits and other indexed portions of the government’s budget. It would also mean tax bracket thresholds would increase more slowly, effectively raising taxes by $62 billion nationwide over a decade.