April 6, 2013

Obama budget plan doles out cuts, tax increases

Social Security payments wouldn't rise as fast under the president's proposal to control future spending.

By ANDREW TAYLOR and JIM KUHNHENN / The Associated Press

(Continued from page 1)

Barack Obama, John Boehner
click image to enlarge

President Obama presented a budget on Friday that featured cuts to spending and tax hikes. Speaker of the House John Boehner said the president should not tie savings in entitlement programs to raising taxes.

The Associated Press

APPLES, ORANGES – AND THE 'CHAINED' CPI

A key feature of President Obama's budget plan is a revised inflation adjustment called the "chained CPI." A chained consumer price index formula would effectively curb annual increases in a broad swath of government programs but would have its biggest impact on Social Security.

The concept behind the chained CPI is that consumers substitute lower-priced alternatives for goods whose costs spike. So, for example, if the price of oranges goes too high for some consumers, they could buy alternatives like apples or strawberries if their prices were more affordable.

This flexibility isn't considered in the current system of gauging inflation, a calculation that determines how much benefits grow each year. Taking it into account means such benefits won't grow by as much.

– The Associated Press

The inflation adjustment would reduce federal spending on government programs over 10 years by about $130 billion, according to White House estimates. Because it also affects how tax brackets are adjusted, it would also generate about $100 billion in higher taxes and hit even middle income taxpayers.

Once the change is fully phased in, Social Security benefits for a typical middle-income 65-year-old would be about $136 less a year, according to an analysis of Social Security data. At age 75, annual benefits under the new index would be $560 less. At 85, the cut would be $984 a year.

The concept behind the chained CPI is that consumers substitute lower-priced alternatives for goods whose costs spike. So, for example, if the price of oranges goes too high for some consumers, they could buy alternatives like apples or strawberries if their prices were more affordable. This flexibility isn't considered in the current system of gauging inflation, a calculation that determines how much benefits grow each year. Taking it into account means such benefits won't grow by as much.

Advocates for the elderly say seniors pay a higher portion of their income for health care, where costs rise more quickly than inflation.

The White House has said the cost-of-living adjustments would include protections for "vulnerable" recipients.

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