The White House Budget Office is considering its first update to inflation adjustment guidelines for poverty thresholds since 1978, with potential consequences for benefit programs serving low-income households.
The initiative is part of a re-evaluation of six inflation indexes used to track the impact on consumers of rising or falling prices. One of the indexes is used to adjust poverty thresholds, which underlie the calculation of eligibility for a number of benefit programs including Medicaid, food stamps and school lunches and breakfasts for poor children.
The Office of Management and Budget, which has provided guidance to agencies on the current measurement that hasn’t changed in four decades, wants to consider whether updates are warranted.
The OMB isn’t deciding on any particular course of action; for now, it’s a simple two-page notice in the Federal Register, published last Tuesday, open for public comment through June 21. But as the agency said, changes to the poverty thresholds, “including how they are updated for inflation over time, may affect eligibility for programs that use the poverty guidelines.”
The Department of Health and Human Services develops poverty guidelines based on poverty thresholds. Under updated guidelines for 2019, the poverty line stands at $12,490 for a single person and $25,750 for a family of four. Multiples of the poverty guidelines are used to determine eligibility for certain programs; for instance eligibility for the Supplemental Nutrition Assistance Program, formerly known as food stamps, runs up to 130 percent of the poverty line. Medicaid eligibility goes up to 138 percent of poverty, while health insurance exchange subsidies go up to 400 percent.
Slower inflation, lower deficits
If official price indexes grew more slowly, then both benefit payments and caseloads would also grow more slowly, saving money over time. According to rough calculations based on Congressional Budget Office data, moving to what’s known as a “chained” Consumer Price Index would cut baseline spending on mandatory programs by $203 billion over a decade. Most of that is Social Security, which wouldn’t be affected unless Congress changed a 1972 law, but some $35 billion in cuts could fall on means-tested programs for lower-income households.
Chained CPI factors in consumer substitution in its measurement — if the price of pork rises faster, consumers may buy chicken instead, therefore keeping inflation slightly lower for the entire basket of goods. Advocates of chained CPI say it’s a more accurate calculation and better reflects consumer realities.
“I welcome this,” said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget. Goldwein said not having an accurate understanding of how price changes realistically affect consumers “leads us to have a misperception of the needs of the economy and the policies that are necessary.”
Moving to a government-wide chained CPI has been a staple of past deficit-reduction efforts, including policies pushed by Goldwein’s group. President Barack Obama proposed switching to chained CPI in his fiscal 2014 budget request, but dropped it the following year after a liberal outcry.
The Center on Budget and Policy Priorities criticized the OMB initiative, saying it would weaken public assistance programs and increase hardship especially for people who “work hard but are paid low wages.”
In a recent report, CBO said the chained index has grown an average of 0.25 percentage points more slowly per year since 2001 than the traditional CPI measure. The agency said using chained CPI “would reduce federal spending, and savings would grow each year as the effects of the change compounded.”
One of the objections to chained CPI is that it may not accurately capture the effect of inflation on retirees who typically spend more of their income on health care, where costs rise faster than inflation. But others argue it is difficult to measure the impact of rising health care prices on consumer well-being, since higher prices may also reflect improvements in medical care.
Tax law precedent
While the OMB doesn’t suggest the use of any particular price index, the agency’s notice specifically notes that chained CPI is among the options they are looking at. And the OMB notes Congress has already dictated the use of chained CPI for tax bracket thresholds and tax credits, which means over time households will be paying more in tax or receiving smaller refunds, generating more revenue.
The 2017 tax overhaul which mandated that change was estimated to save $134 billion over 10 years, according to the Joint Committee on Taxation; about $19 billion of that would be cut from payments to households too poor to owe income tax. That’s why the OMB notice causes anxiety on the part of advocates for social programs, who’ve already witnessed the Trump administration try to take aim at programs like Medicaid and food stamps through rule-making processes.
If OMB were to replace the current inflation measure with chained CPI, trimming $35 billion over a decade would mean a roughly 0.5 percent cut from affected programs, based on the CBO’s analysis.
That may not seem like a large cut in a universe of programs projected to spend more than $7 trillion over the next 10 years. But the cuts would affect programs that serve lower-income Americans such as Medicaid, prescription drug benefit subsidies under Medicare, tax credits to pay for health care premiums under the 2010 health care law, SNAP, and child nutrition programs.
While it seems the White House could make the switch to chained CPI by updating its 1978 directive, changing the benefit calculation for Social Security would need to be changed in the statute. That’s a much tougher lift, though if the change goes through and there’s no apparent dramatic impact to other benefit programs, it could become more enticing as the Social Security Trust Fund veers toward insolvency in the 2030s.