Inflation change could cut into Social Security

WASHINGTON - Once considered untouchable, Social Security is now in play in the debt-ceiling negotiations. And that could mean higher income taxes for many U.S. families in addition to shaved benefits for tens of millions of retirees as they age.

Social Security became part of the private discussions between President Obama and Republican House Speaker John A. Boehner on coming up with "something big" for reducing deficits by $2 trillion to $4 trillion over the next decade.

White House officials said Thursday that could include a new inflation measure for Social Security that, through a combination of reduced benefits and higher taxes, could produce federal savings close to $200 billion. Low- and middle-income families could be hit.

The proposal would represent a reversal for Obama. In contrast to his pledge to target tax increases at the wealthy, high-income families would largely be spared from tax increases that would result from changing the way inflation is measured. Until now, the administration has been adamant that Social Security does not add to the deficit and should not be a part of deficit-reduction talks.

Adopting a new inflation measure would allow policymakers to gradually cut benefits and increase taxes in a way that might not be readily apparent to most Americans. The inflation measure under consideration is called the Chained Consumer Price Index. On average, the measure shows a lower level of inflation than the more widely used CPI.

A Chained CPI assumes that as prices increase, consumers buy lower cost alternatives, reducing the amount of inflation they experience. If the price of beef increases while the price of pork does not, people will buy more pork. Or, as opponents mockingly argue, if the price of home heating oil goes up, people will turn down their heat and wear more sweaters.

There's no indication at this point whether Obama and congressional Republicans - and Democrats - will agree on the change, and, if they do, how broadly it might be applied. Another private meeting at the White House is set for Sunday.

The measure, if adopted across the government, would have a wide-ranging effect on taxes and benefits, and those changes would grow over time. The change would mean smaller annual increases in Social Security payments, government pensions, and veterans' benefits. Current payments would not be affected, but recipients would get smaller increases in the future.

Overall, the proposal would cut Social Security benefits by $112 billion over the next decade, according to the nonpartisan Congressional Budget Office. It would cut government pensions and veterans' benefits by $24 billion over the same period if adopted.

Reaction from Democrats was swift Thursday. House Democratic leader Nancy Pelosi said her caucus won't support a plan that includes Social Security cuts. "We are not going to balance the budget on the backs of America's seniors," she said.

Seniors lobby AARP "will not accept any cuts to Social Security," CEO A. Barry Rand said.

The White House has been negotiating with congressional leaders over ways to reduce the government's huge budget deficit as part of a deal to extend the nation's ability to borrow. The government has hit its $14.3 trillion borrowing limit and is in danger of defaulting on its obligations if the limit is not increased by Aug. 2.

In most years, Social Security payments increase based on an inflation measure called the Consumer Price Index for Urban Wage Earners and Clerical Workers. If Social Security adopted the new measure, annual increases would be 0.3 percentage points smaller, according to actuaries. That could be a tough hit for seniors.

As the possible cuts are phased in, a typical 65-year-old who started receiving Social Security benefits at age 62 would get an annual reduction of about $130, according to an analysis by the Social Security actuaries. By the time that retiree reached 75, the annual cut would be $560. At 85, the cut would be $984 a year. Average Social Security benefits now are about $1,100 a month, or about $13,000 a year.