Fed groups pounce on Obama's COLA-cutting proposal

Tuesday - 12/18/2012, 5:10pm EST

President Barack Obama and House Speaker John Boehner remain far from a compromise in deficit-reduction talks to avert the "fiscal cliff."

But, there is surprisingly little daylight between the two when it comes to a proposal that would limit annual cost-of-living increases under Social Security.

In the latest proposals traded back and forth between the White House and Boehner, the President proposed changing the formula the Labor Department uses to measure inflation — which would reduce annual COLAs for Social Security beneficiaries, including federal and military retirees.

The President's latest offer containing a "chained Consumer Price Index," mirrors a similar proposal Boehner put forth earlier in the talks.

The Bureau of Labor Statistics currently calculates inflation by measuring the difference in price of a number of key goods and services. The chained CPI, on the other hand, assumes that people often substitute lower-cost alternatives, especially during tough economic times — which means smaller annual COLA increases.

While specifics are hard to come by and details shift by the day, federal-employee unions and groups point to the COLA proposals as evidence their benefits remain on the table in deficit-reduction talks.

Unions pounce on proposal

The American Federation of Government Employees urged lawmakers to reject what it called Obama's "capitulation" on the COLA proposal.

"President Obama could not have picked a worse or more regressive item in the House Republican budget than the chained CPI," said AFGE National President J. David Cox Sr. in a statement.

The National Active and Retired Federal Employees (NARFE) Association, an employee group, wrote to members of Congress also asking them to oppose the shift to a chained CPI.

Joseph Beaudoin, NARFE's national president, said the new inflation formula would fail to take into account the rising costs of health care — as does the current formula.

The chained CPI is expected to reduce annual COLAs by an average of 0.3 percentage points each year. But the unions say the reductions compound over time and would hit long-time beneficiaries the hardest.

"While the short-term reduction in benefits may be modest, the long-term reduction will be substantial," Beaudoin wrote in the letter to lawmakers. "In 30 years, when many current beneficiaries will still be alive, retirement income from these sources will be 9.2 percent lower."

Big savings, unintended tax increases?

Moving to the chained CPI could save nearly $220 billion over 10 years, according to a 2011 Congressional Budget Office report.

But opponents of the new CPI formula say it could lead to unintended tax increases. Because income-tax brackets are also determined by cost-of-living increases, moving to a chained CPI would also essentially propel lower-income people into higher tax brackets, according to the Center for Economic and Policy Research.

Many Democrats remain staunchly opposed to tinkering with the COLA formula — or any changes to Social Security. However, the chained CPI proposal has gained support not only from conservatives but also more centrist think tanks, including the Committee for Responsible Federal Budget and the Center for Budget and Policy Priorities.

CBPP has said the chained CPI option would be a "reasonable" part of a broader deficit-reduction package only if steps were taken to limit the harmful impact of long-term benefit cuts to beneficiaries.

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