Chained CPI Could Cut Social Security Benefits

Social SecurityMy Comments: The following is an arcane topic that will bore some of you and cause you to find something else to read. That’s OK. But for those of you interested in what might happen to your Social Security income, you might find it interesting.

Economic fundamentals tells you that, over time, a balance has to be achieved between revenue and spending if there is a reason to keep the organization alive. The dilemma comes in the definition of “over time”. If your time frame of reference is relatively short, then you cannot sustain much annual disparity between inflow and outflow. If, however, your time frame is relatively long, then you can accept a degree of imbalance because secular forces bring you back to equilibrium.

One of our political parties has one perspective with respect to the current imbalance and the other has a different perspective. I suspect neither is wholly right or wrong. And while I tend to favor the Democratic approach, I recognize there is a need to address the problem. This can be done by both increasing revenue and reducing spending which is where the pain starts.

As a recipient of Social Security payments, I admit to a certain bias. Realistically, my personal role will end sometime in the next thirty years. But then there is the question of my children and then my grandchildren. I want what is best for them too. So I reluctantly agree to a changing of the rules to help make that possible.

January 2, 2014 • Karen DeMasters

“Chained CPI” is a phrase floating around the Social Security debate that is important to current and future Social Security beneficiaries.

Chained CPI would change the way cost of living adjustments (COLA) for Social Security and other other government programs are calculated.

The COLA increase that is applied to Social Security, food stamps, Supplemental Security Income, and other programs is determined by the increase in the consumer price index (CPI). The formula has been changed over the years to attempt to make it a more realistic reflection of increases in the price of consumer goods, according to economists.

The chained CPI assumes that when prices increase for one product, people substitute a less expensive product. For instance, if the price of beef increases, people could switch to chicken. However, economists point out that there are no substitutes for many of the expenses that elderly people face, such as medical care and energy costs.

Usually, changes in the way the COLA is calculated can be made administratively, but some, such as adopting the chained CPI, require Congressional action. President Obama raised the possibility of making the change, but it was not included in the budget recently passed by Congress.

If the chained CPI were adopted, the change would be small at first because recent COLAs have been small. The COLA for 2013 was 1.7 percent and for 2014 is 1.5 percent. A monthly Social Security check of $1,250 increased to $1,271.25 using the current CPI. With a chained CPI, the increase would have been 1.4 percent for 2013 or $3.75 less a month or $45 a year, according to AARP.

But the COLA is compounded each year. Using the chained CPI, a slightly reduced COLA would be applied to a slightly reduced Social Security check. The reductions would snowball over time impacting retirees in the future to a larger extent.

The National Women’s Law Center calculated the average beneficiary would lose $8,100 total by age 80 and $19,245 by age 90.

“Most economists think the chained CPI more accurately reflects the increases in the cost of living,” says Gary Burtless, an economist with the Brookings Institution in Washington and a former economist with the Department of Labor. The bipartisan Simpson Bowles Commission created by President Obama recommended the change.

Others argue Social Security benefits should not be reduced in any way. Democratic Massachusetts Senator Elizabeth Warren is a leader in the fight to preserve Social Security and Medicare benefits.

“Supporters of the chained CPI say that it is a more accurate way of measuring cost of living increases for seniors. That statement is simply not true. Chained CPI falls short of the actual increases in costs that seniors face, pure and simple,” she says. “Chained CPI is just a fancy way of saying ‘cut benefits.’”

The National Committee to Preserve Social Security and Medicare also has fought the proposed change.

“We were pleased to see that it was not in the recent budget deal,” says Pamela Causey, director of communications, “but the battle is not won. Unfortunately, this will come up again. This is a time period when benefits need to grow and expand. The chained CPI will dramatically reduce benefits over the course of time.”