Obama Budget to Include Chained CPI, Retirement Account Caps to Reduce Deficit

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By Aaron E. Lorenzo and Jonathan Nicholson  

President Obama's upcoming budget proposal for fiscal year 2014 will include a change in the way certain tax parameters and retirement benefits are measured as part of a broader blueprint for $1.8 trillion in overall deficit reduction over the next decade, White House officials confirmed April 5.

That and other details in the package largely mirror proposals Obama offered in December discussions with House Speaker John Boehner (R-Ohio), though the administration is not rolling out its budget until April 10. It will include a mix of revenue increases, spending cuts, and spending plans, and opinions differ on whether any components in the plan will gain traction.


Using the chained consumer price index to measure inflation would amount to a technical correction, said Robert Bixby, executive director of the Concord Coalition, adding that its inclusion in Obama's budget legitimizes it like never before.




A dismissive statement from Boehner's office noted that Obama's December offer fell short then, and said House Republicans remain cool to the package because the New Year's fiscal cliff deal already includes more revenue, most visibly a higher marginal tax rate on those who earn more than $400,000 or $450,000 for households. Boehner also complained that Obama would only reduce the deficit by $600 billion over the next decade.

But White House Press Secretary Jay Carney struck a more sanguine tone.

“The president's engaged in conversations with Republicans in the Senate, in particular, but also in the House, in an effort to find common ground to see if there is a willingness to embrace the idea that we can reduce our deficits in a balanced way and continue to invest in our economy and middle-class families,” he said during his daily press briefing. “And if there is, then we'll be able to get something done.”

One area that could generate some agreement in the protracted budget debate: using the chained consumer price index as opposed to CPI alone. Measuring inflation that way would increase the amount of income subject to taxation and lead to higher tax revenues, while also slowing the growth of Social Security benefits as an avenue for savings.

Chained CPI is likely to grow at an average annual rate that is 0.25 percent less than standard CPI over the next decade, according to a Congressional Budget Office analysis. So using chained CPI would raise $100 billion in revenue and achieve $130 billion in spending savings, according to White House estimates.

A Measure of Budget Optimism

Such a change would amount to a technical correction, said Robert Bixby, executive director of the Concord Coalition, adding that its inclusion in Obama's budget legitimizes it like never before. He said Obama's specific proposals to change taxes and entitlements demonstrate a new level of seriousness by no longer restricting the ideas to closed-door debates with Boehner.

While not expecting a so-called grand bargain on the budget, Bixby said he is cautiously optimistic that the White House and Congress can strike some sort of fiscal deal on a smaller scale. And in that context, he said revenue raising through tax expenditures in the forthcoming Obama budget could prove important to the extent such ideas overlap with the budget plan produced by Senate Budget Committee Chairman Patty Murray (D-Wash.), which passed 50-49 last month with an instruction to the Senate Finance Committee to raise $975 billion in new revenue (51 DTR G-8, 3/15/13).

She and her counterpart from the other side of the Capitol, House Budget Committee Chairman Paul Ryan (R-Wis.), have said that they want to raise revenues by closing so-called loopholes, but they have been vague on specifics.

“The president's proposals in this regard could be a test of how seriously congressional budget writers are about closing loopholes,” Bixby said.

Still, while bipartisan anti-deficit budget groups in particular regard chained CPI as potential common ground between Democrats and Republicans that would provide both spending cuts and increased revenues, it would likely face fierce resistance among some Democrats.

Liberals in both the House and Senate have staked out opposition to the idea. Sen. Bernie Sanders (I-Vt.) proposed an anti-chained CPI amendment when the Senate considered its budget resolution and the amendment passed on a voice vote, with no dissent.

“This is not a minor tweak, as its proponents contend. Under Obama's proposal, according to the Social Security Administration, 65-year-old retirees would lose more than $650 a year by their 75th birthday, and more than $1,000 a year would be cut from their benefits once they reach 85,” Sanders said April 5.

Opponents to Chained CPI on Both Sides

Sanders does not stand alone.

Among House Democrats, who have often provided key support for high-profile votes in the wake of GOP defections on budget issues, there is also substantial opposition. The Congressional Progressive Caucus said April 5 that 107 House members--more than half the Democratic caucus--had signed the group's letter against benefit cuts in Social Security, Medicare, or Medicaid as part of a package to replace the sequester cuts.

“Republicans have been trying to dismantle Social Security ever since President Roosevelt proposed it during the Great Depression. We should not try to bargain for their good will with policies that hurt our seniors, especially since they've been unwilling to reduce tax loopholes for millionaires and wealthy corporations by so much as a dime,” said CPC co-chairmen Reps. Raul Grijalva (D-Ariz.) and Keith Ellison (D-Minn.).


After saying in December that using the new way to calculate inflation was not a benefit cut, Pelosi in early January told a small group of reporters that she was only bluffing.




House Minority Leader Nancy Pelosi (D-Calif.) has sent conflicting signals on whether CPI should be on the bargaining table. After saying in December that using the new way to calculate inflation was not a benefit cut, Pelosi in early January told a small group of reporters that she was only bluffing.

The tax increase inherent in shifting to chained CPI is also troubling for conservatives opposed to new revenue, because they think Obama received his fair share in the fiscal cliff deal. The change would introduce what they refer to as bracket creep.

“With a smaller estimate for inflation, you're more likely to move into a higher tax bracket,” said Curtis Dubay, a senior policy analyst for tax policy at the Heritage Foundation.

Carney conceded more than once that chained CPI is not an ideal solution, but necessary to try to find some agreement. Across the aisle, Ryan praised the president's Social Security proposals for challenging his party on entitlements.

But Ryan was also critical. He said he was wondering if Obama's budget would reach balance in any of its years, whether it would increase spending or taxes, and whether it would provide enough funding for defense.

But a House Democratic aide, speaking on condition of anonymity, warned Republicans the proposal is “a package deal, not an a la carte menu.”

'Not an a la Carte Menu'

“Republicans can continue to ignore it. They can continue to cherry pick his cuts while ignoring revenue. But either tack would reveal their disinterest in compromise. It's time for Republicans to take another look at this package for what it is: a serious, comprehensive proposal reflecting major concessions,” the aide said.

Combined with $2.5 trillion in deficit reduction the White House claims from previous fiscal deals, Carney said the president's additional $1.8 trillion proposal would increase total deficit reduction to more than $4.3 trillion over 10 years and replace blunt sequester spending cuts in the process.

By 2016, that would lower the deficit to 2.8 percent of the U.S. economy, as measured by gross domestic product. That share would decline to 1.7 percent by 2023, which White House officials have labeled a fiscally sustainable path.

Beyond chained CPI, the new Obama budget would also raise some taxes. For example, it proposes to increase taxes on cigarettes and other tobacco products to pay for publicly funded preschool education, an idea Obama floated in his State of the Union address. It also includes $50 billion in infrastructure spending, a repeat proposal from past Obama budgets.

In addition, it repeated a proposal to limited tax deductions to 28 percent for top earners, which would be broader than the limit enacted as part of the fiscal cliff deal, Bixby and Dubay agreed. But Dubay said he remains uncertain how much more revenue such a cap would raise, not to mention how it would interact with limits in the fiscal cliff deal that lower the value of personal exemptions and most itemized deductions on single taxpayers who earn $250,000 or more and married filers with income of $300,000 or more.

The Obama budget would also limit individuals from accumulating more than $3 million in individual retirement accounts and other tax-preferred retirement accounts. That would cap an individual's total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, equal to about $3 million this year.

It would raise $9 billion in revenue over a decade, according to a White House estimate, which Dubay attributed to pulling forward tax revenue from beyond the 10-year budget window.

Among other elements in Obama's budget plan, the president also proposed an unspecified amount of cost savings by ending disability claimants' ability to collect full benefits and unemployment benefits at the same time.

By Aaron E. Lorenzo and Jonathan Nicholson  

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