WASHINGTON (Reuters) - Economists sometimes refer to inflation as a hidden tax. As prices rise, people become poorer unless their incomes can keep up.
Now Washington is considering changes to the way it calculates increases in the cost of living that would slow down gains in monthly Social Security payments to seniors, effectively hitting their income. The aim is to reduce the country's yawning budget deficit.
Many seniors and Democrats oppose the proposed changes, and even those who support them admit future pensioners would be less well off than under current law.
"People are going to end up with lower benefits," said Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, which has long advocated for slowing down cost-of-living adjustments in the Social Security program.
However, the question of whether the proposed changes are fair - and whether they will even make seniors poorer - is not so cut and dried.
Economists like Van de Water argue the government currently overestimates inflation and the changes, if adopted, would leave the buying power of Social Security checks unchanged.
Others argue the opposite is the case: that the government currently underestimates inflation for seniors, who therefore stand to fall further behind.
President Barack Obama, engaged in tense talks with Republicans over how to tame America's $16 trillion debt, on Monday proposed switching the inflation index used to calculate increases in monthly Social Security checks.
By using the index favored by Obama - known as chained-CPI - the average worker retiring at age 65 would get about $650 less a year in Social Security payments by age 75, and roughly $1,130 less annually by age 85, according to the left-leaning Center for Economic and Policy Research, a think tank in Washington.
Chained-CPI differs from the government's other consumer price indexes because it better accounts for the changes in shopping habits driven by increases in prices. If the price of beef rises faster than pork, people will often buy more pork as a substitute.
This doesn't mean people are poorer because they buy less pork. It's just part of the constant churn in family budgets. As the years go by, people stop buying some goods because they are expensive. Most economists agree chained-CPI is the best way to track changes in the cost of living for the average worker.
Since the government started publishing chained-CPI data in 2002, annual increases in the index have been about a third of a percentage point less than the Consumer Price Index for wage earners that is currently used for Social Security.
Slicing that much off retirees' monthly checks from the government - relative to current law - is among the less unsavory ways for the government to save money, proponents argue.
"There are a lot of ideas that are far worse," said Van de Water, who advocates easing the pain on some seniors by boosting their cost-of-living adjustments should they live longer than average.
The White House says its proposal would shield some seniors from the chained-CPI effect, though it has not provided details on how this might be done.
Shifting to chained-CPI could save the government a lot of money. The Congressional Budget Office in March 2011 estimated it would reduce spending on Social Security by $112 billion from 2012 through 2021. If it were used on all federal benefits programs, which the White House said on Tuesday that it also favors, the government might save $145 billion over the same period.
The AARP, a powerful lobbying group for seniors, abhors the idea of using chained-CPI to adjust Social Security benefits, which it says would especially hurt those who rely on checks from the program as their primary source of income.
"The reductions with a chained CPI would disproportionately affect the poor," said AARP spokesman Jonathan Peterson.
Some economists think Social Security payments are already failing to keep up with actual inflation because seniors spend more on health care, where costs are rising especially quickly.
The Labor Department has found prices paid by the elderly rose on average 3.1 percent annually between 1982 and 2011, compared to a 2.9 percent annual increase in average general inflation.
Health care is also a service that doesn't really have a substitute, so if a chained-CPI were constructed that was weighted for purchases made by seniors, it might show an even higher rate of inflation, said Dean Baker, an economist at the Center for Economic and Policy Research.
"It's not like we are being too generous with benefits for our seniors," Baker said.
Reporting by Jason Lange; Editing by Tim Ahmann and Lisa Shumaker