Cuts to Social Security? What Obama is proposing.

In an effort to reach a bipartisan agreement to reduce federal deficits, President Obama is backing a change in the inflation formula used to calculate adjustments in Social Security benefits.

President Obama is embracing some controversial entitlement reforms in an effort to reach a bipartisan agreement to reduce federal deficits.

Most politically combustible: He’s backing the idea of changing the inflation formula used to calculate annual adjustments in Social Security benefits, in a manner that would save federal dollars and be less generous to seniors.

That’s the word that emerged Friday about the president’s budget proposal, which is set to be released on April 10.

The Social Security idea, called the chained consumer price index or "chained CPI," isn't new. Obama has floated it before, as have bipartisan groups seeking ways to curb a risky buildup of national debt.

Economists say using the new formula might mean Social Security checks would go up by about 0.3 percentage points less per year.

It sounds like a little, but the latest news sparked immediate and vigorous push-back from groups seeking to hold the line against entitlement cuts.

“The American people are overwhelmingly opposed to cutting Social Security benefits, and if Democrats don't want to go down in history as the party that destroyed one of the greatest social programs of all time, they need to stand up and unambiguously reject the president's proposed cuts,” said Becky Bond of CREDO, a progressive political action group, in a statement by e-mail Friday.

Sen. Jeff Merkley (D) of Oregon pounced on the idea in a comment via Twitter: “The formula we use to adjust cost-of-living changes for seniors needs to reflect the real costs they face, not the budgetary fantasies of D.C.,” he said.

White House spokesman Jay Carney presented Obama's proposal as an overture that could open the door to good-faith negotiations with Republicans in Congress. 

"The offer that the president made to Speaker Boehner and which is incorporated in the president's budget is not the president's ideal approach to our budget challenges, but it is a serious compromise proposition that demonstrates that he wants to get things done," Mr. Carney said. He added that Obama "believes that we in Washington ought to do the business of the American people by coming together and finding common ground."

So, what is this “chained CPI” idea all about, and would it gut Social Security or help make the program solvent for future generations?

Here’s a primer on the debate:

Since 2002, the US Bureau of Labor Statistics, which measures official inflation using its consumer price index (CPI), has released an alternative inflation calculation called the chained CPI.

The alternative measure tends to find smaller changes in consumer prices, because it contains extra adjustments for the way consumers might substitute one good or service for another.

If beef gets a lot more expensive and chicken stays the same, consumers will tend to buy more chicken and less beef. The data gatherers will take note of that shift in buying habits, and give a little more weight in the overall price index to the cost of chicken, and a little less to the cost of beef.

If inflation is running at a 2 percent annual pace in the CPI, it will likely be about 1.7 percent in the chained CPI.

That’s a modest difference in one year, but over time it adds up.

After 30 years of retirement a Social Security beneficiary’s annual income would be $1,400 less under chained CPI than under the current gauge, says the National Committee To Preserve, Social Security & Medicare.

The change would affect some other federal benefits that are adjusted for inflation, and could save the Treasury $100 billion or more over 10 years.

Boosters of the change say the chained CPI is not a gimmick to reduce federal deficits, it’s a more accurate way of measuring the real change in people’s living costs. Thus, in their view, this is a sensible step that can close about one-fourth of the Social Security program's projected funding shortfall.

But foes reject the idea that it’s more accurate.

For Obama, backing the idea is one way to try to bring Republicans to the bargaining table – showing he’s serious about entitlement reform even as he demands that Republicans do something they don’t like: raise additional tax revenues as part of a deficit-cutting deal.

He recently said he's ready to do "tough stuff" in the name of fiscal discipline, if Republicans will, too.

Finance experts say the chained CPI is only a partial fix to Social Security – but a potentially important part of a mix that could also include tax hikes or raising the eligibility age.

“This change alone would eliminate about one-quarter of the long-range deficit” facing Social Security, which equals about 2 percent of America’s taxable payrolls over the next 75 years, according to a 2011 analysis of the chained-CPI idea by Boston College’s Center for Retirement Research.

Social Security has a projected shortfall because retirees are living longer, and more people are scheduled to reach retirement age relative to the number of working-age Americans. The gap is often measured as a share of taxable payrolls, because the program is funded by payroll taxes levied on current workers and employers.  

“Mov­ing to a chained CPI is much more than a technical correction,” the Center for Retirement Research concluded in its report. “Under current circumstances, moving to a chained index should be viewed as a cut in benefits.”

The analysis said the change could be felt most by the poorest and oldest seniors as effects of the adjustment compound over time. It said these “adverse impacts can be mitigated by one-time adjustments around age 85,” something that Alan Simpson (R) and Erskine Bowles (D) suggested as chairs of a presidential commission on fiscal reform in 2010.

Another idea is to couple the “chained CPI” idea with the adoption of a special inflation index for Social Security that reflects the specific goods and services purchased by seniors.

Other ideas for closing Social Security’s future funding gap have been outlined by Simpson and Bowles and others.

Doing nothing about the issue is a bad idea, many economists say, because the size of the shortfall grows if unaddressed, and rising federal debts could weaken the economy.