How Government Inflation Policies Would Smack the Middle Class

The federal government proposes to use inflation to smack the middle class.  The Federal Reserve has an inflation target of 2%, and some Fed officials, fearing that deflation is around the corner--have recently been openly grousing about how inflation--running just above 1%--is too low.  They want to take away your spending power faster.  One of their primary tools for fueling inflation is to obliterate positive interest rates--or, stated otherwise, to deprive you of interest income.  Your faint memories of the distant past, when interest income actually required you to fill out Schedule B for your tax return, will become entirely ethereal.

Meanwhile, the Obama administration has proposed to use a less generous inflation adjustment (the Chained CPI) for Social Security recipients and federal and military retirees.  The Chained CPI would also be used to adjust tax brackets, with the effect that taxes would be higher than under the currently used CPI.  In other words, the Fed wants to increase inflation, while the President wants less protection for retirees and taxpayers from the ravages of inflation. 

Those whose incomes are middle class or lower (i.e., $100,000 a year or less) tend to be vulnerable to inflation.  They have little discretionary income left after necessary monthly expenses, and consequently, not much of a buffer against increases in inflation.  Retirees are especially defenseless.  Add the heavier taxes resulting from the Chained CPI, and the federal government's inflation policies could effectively reduce middle class and retiree incomes in real terms.

With the sluggish U.S. economy 70% dependent on consumption, it makes no sense for the federal government to deploy inflation as a weapon against those with middle class or lower incomes.  Reduce incomes and people will consume less.  If these federal policies somehow stimulate greater economic growth, it isn't hard to figure who will benefit the most from that greater growth, and it ain't gonna be the lowest 80%. 

The Chained CPI hasn't become law yet, and not all Fed officials want to ignite inflation.  So the worst may not come to pass.  But the lowest 80%, already facing uncertain employment prospects and stagnant wages, really don't need to be squeezed by inflation policies that make sense only to those well-to-do people who are insulated from their impacts.

Your Social Security Benefits: Countering the Chained CPI

The President has proposed using the Chained CPI as the measure for cost-of-living increases in Social Security benefits, and other federal and military retirement benefits.  The impact on benefits would be to reduce the annual increase by about 0.3%.  While this amount seems small, it accumulates over time.  After ten years, your benefits would be reduced by 3-4% per year.  After twenty years, the reduction would be around 6-7% per year.  If you receive Social Security for thirty years, the reduction would be around 9% or more per year.  For those relying heavily on Social Security, which could be up to half of all recipients, that can hurt, especially considering the unstoppable, uber-inflationary costs of medical care for the elderly.  The Chained CPI proposal is criticized for hitting the most elderly and vulnerable the hardest.  Women take a bigger hit than men because they live longer and depend more heavily on Social Security.

The Chained CPI would also increase taxes.  Tax brackets and certain other features of the tax system are adjusted for inflation.  If the adjustment is smaller, as it would be with the Chained CPI, the effect would be to raise taxes.  As with Social Security benefits, the tax increases would fall most heavily on those at the lowest income levels (who otherwise are taxed lightly).

If you're wondering if implementation of the Chained CPI would affect you, the answer is yes.  It affects everyone, although the well-off would suffer the least in relative terms.  The likelihood of the adoption of the Chained CPI is difficult to predict.  Conservatives and many moderates generally like the idea, although the white Boomers at the heart of the Republican Party will sooner or later figure out that they would take a bullet for their party's ideology from the Chained CPI.  When they do, we'll find out if there's a cure for stupid.

Anyway, how could you counter the impact of the Chained CPI, if it's adopted?  Save more.  Start saving more now, and save more every month.  It's hard to estimate how much more, because the answer would depend heavily on the specifics of your financial situation.  But a rough guesstimate might be 1% of your income or a bit more if you're in your 20s or 30s, 2% for those in their 40s, and 3-4% if you've reached the Big 5-0.  This may not sound like much, but try doing it (remember, this amount would be in addition to other saving you should be doing for retirement).  A lot of Americans can't.  Those who fail should acquire a taste for dog food, because it looms in their futures.

President Obama may think that proposing the Chained CPI keeps federal spending at a relatively stimulative level in the near term future, to help pull the economy out of the Great Recession, while reducing long term spending to help control the deficit.  But if rational Americans begin saving more to compensate for the lower benefits and higher taxes promised for their retirements, the near term impact of the Chained CPI would be to reduce consumption and retard recovery.  And continuation of the Great Recession would prolong the large deficits we now have.

The President seems obsessed with attaining a Grand Compromise.  He seems to think doing so will burnish his legacy.  That's weird.  Consider the Presidents who attained greatness through compromise.  There's . . . uh . . . well . . . I mean . . . you know . . .  Okay, look at the flip side of the question.  Consider the great Presidents.  George Washington, who lost 7 of the 9 major battles he fought in the American Revolution, didn't compromise with the British.  Abraham Lincoln, who dallied initially with compromise until the Confederates digitally and martially expressed their views, became the great non-Compromisor who rid America of the curse of slavery.  Franklin Delano Roosevelt, greatest President of the 20th Century, allowed Republican leaders as much input into the New Deal as Mozart had into Jailhouse Rock.  Let us recall the great proponents of compromise in America's history:  Henry Clay, Daniel Webster, and John C. Calhoun.  Their accomplishments as progenitors of accommodation are known to as many as 26% of all high school students for a period of time not exceeding 36 hours before and 2.14 minutes after exam time.  This is a desirable legacy?  Well, maybe in the eyes of some, but, please, not at the expense of those least able to bear that expense.