12/21/2012 02:02 pm ET Updated Feb 20, 2013

Eggs, Legs and the Chained CPI

As the fiscal cliff approaches, I am reminded of an old country adage about sacrifice that should serve as a warning for the negotiators.

As the story goes, one day a farmer asks all the animals to contribute to help him make breakfast. The animals agree that they want to do their part. With basket in hand, the farmer goes to the chickens, who roll off their nests to offer an egg. With bucket in hand, the farmer goes to the cows, who share their milk. Finally, with blade in tow, the farmer approaches the lambs, who turn around only to see the farmer intends to cut their leg off.

At this point the otherwise docile lamb kicks the farmer and asks, "How is this fair? That chicken just has to give up an egg, but I am supposed to give you one of my legs?"

As we talk about the fiscal cliff, we have to pay close attention to the "eggs" and the "legs" and to who is being asked to sacrifice what.

President Obama has done an admirable job negotiating with House Speaker John Boehner, remaining open to compromise and forcing conservatives to back tax increases for the very rich. But recent reports show that he has dialed back on a campaign promise by offering to raise taxes only on those making $400,000 a year or more -- higher than his original cut-off point of $250,000.

This concession could mean $400 billion less in tax revenue from the rich. Combined with other agreements, like a higher earned-income tax credit refund for those under the poverty line, the two sides will still need to find $1.2 trillion in cuts in order to avoid the fiscal cliff.

Unfortunately, it appears that President Obama is ready to trade the "eggs" of the well-off for the "legs" of some of the poor. His proposed relief for the extreme poor -- those living below 50 percent of the poverty line -- does go a ways toward helping the most vulnerable Americans. However, the working poor -- those whose incomes fall just below or just above the poverty line -- would under his proposal see their Social Security benefits shrink over time.

Specifically, President Obama has proposed a change in the way we calculate inflation for social security benefits, using an alternate version of the Consumer Price Index (CPI) called the chained CPI.

Chained CPI is meant to account for human reaction when measuring the price levels of consumer goods. In theory, when prices rise, the average consumer will substitute cheaper products for more expensive ones. When government economists calculate inflation using chained CPI, Social Security benefits will reflect the price of those cheaper products. In short, they will be lower -- up to three percent lower each year.

The main issue with chained CPI is that although seniors spend less on luxury products, they spend a lot more on health care which has been going up much faster than CPI for years. Thus, CPI already appears to be too low to keep many of these recipients heads above water financially.

But the problem runs deeper than many realize. It has to do with the full community of Social Security recipients. And it raises concerns about whose "legs" are on the line.

Social Security is not just for retired workers. The full community of social security recipients -- 56 million people, or one in six Americans -- also includes widows, widowers, children of deceased workers and the disabled. Many of these people also have higher than normal health care costs and thus CPI already underestimates how costs rise for their budgets each year too.

Moreover, nearly 6.3 million Americans receiving Social Security benefits are survivors of deceased workers -- including four million widows and widowers and 1.9 million surviving children. The average benefit payment for a widow or widower over 60 years old is $1,190, while the average payment for a surviving child is $786.

And that's not to mention the nearly nine million disabled workers receiving Social Security benefits, and the 2.1 million relatives of disabled workers.

Just look at Alisha Simms. Alisha's father died when she was still a child. Her father always wanted her to get a good education, but her mother's salary was not enough for college. Her father's Social Security survivor benefits helped Alisha pay for college. Without those benefits, Alisha would not be a practicing attorney today.

There are millions of Americans like Alisha. Too many of them are African American, thanks to poor access to health care in our communities. Some of them are the "extreme poor" and they will be somewhat protected by President Obama's proposed plan. But too many of them are struggling right below the poverty line or just above it. These would be the true victims of the chained-CPI proposal.

The solution is simple. If we want to update the Consumer Price Index in a responsible way, we should ask the Bureau of Labor Statistics to study the entire Social Security recipient population. We need to find out how flexible people with health issues can really be. And we need to account for beneficiaries like Alisha who depend on these cost-of-living increases for their livelihoods.

President Obama has promised this deal would protect the very old and the very poor. But we cannot balance the budget on the back of the poor and the middle class. Simply put, we should not tell people making $250,000 or $350,000 they can keep their "eggs" if the alternative is to ask people who rely on social security for survival to give up their "legs."