By Mark Miller
CHICAGO, Dec 19 (Reuters) – Let’s talk “chained CPI” – a
topic that sounds so wonky only a Washington policy nerd could
love it. And that’s probably what Washington politicians hope it
sounds like to you.
The chained CPI is the new way to measure inflation that
President Obama is proposing to set cost-of-living adjustments
(COLAs) for Social Security and other government benefits. So
far, it is his main concession to Republicans hungry for
entitlement cuts as part of a fiscal cliff deal. And chained CPI
proponents often describe it as a small, relatively painless
change — a technical fix aimed at making COLAs more accurate.
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Switching to a chained CPI is certain to have a very
damaging impact on retirement security, for a simple reason: the
inflation challenges facing seniors just aren’t the same as
those facing other Americans.
I’ll explain why that is in a moment. But first, a bit of
wonkery.
Social Security awards an annual COLA tied to the Consumer
Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The index measures the cost of a market basket of goods and
services; the third quarter index figures are averaged to
calculate the Social Security COLA for the coming year.
Many economists argue that the CPI-W overstates inflation
because it fails to account for the substitution that consumers
make when the price of a particular product or service gets too
expensive. The chained index attempts to reflect these
substitutions. The theory is that a spike in gasoline prices
will prompt consumers to spend less on fuel, perhaps more on
food, and so on.
Plenty of seniors really don’t have those kinds of options.
Most of them live on modest fixed incomes: the average Social
Security benefit this year is $14,800. And 46 percent of
unmarried seniors rely on benefits for 90 percent of their total
income. Much of their spending goes for necessities they cannot
opt out of, such as food, housing, and utilities.
UNEXPECTED HEALTHCARE COSTS
And here is the really big wrinkle: Seniors also spend far
more on healthcare than younger people. Healthcare inflation has
been outpacing general inflation by a wide margin for some time
now. During the past ten years, Medicare Part B premiums have
risen by an average of 7.2 percent; the chained CPI is up by an
average of just 2.25 percent. Healthcare is eating away a
growing portion of seniors’ COLAs.
The initial impact of a chained CPI looks small — the
Social Security Administration estimates it would reduce the
COLAs by three-tenths of a percent annually. If it were in place
now, the COLA just awarded for 2013 would have been 1.4 percent,
rather than 1.7 percent. But the Social Security COLA is
compounded, so the effect would snowball over time.
The National Women’s Law Center has calculated that the
average beneficiary filing for benefits at age 65 would lose
$8,100 by age 80, and $19,245 by age 90. Putting this into more
concrete terms, NWLC calculated the lost benefits into the
number of weeks of groceries lost annually for a single elderly
woman, starting at 65 with a monthly benefit of $1,100: six
weeks at age 70; 13 weeks at age 80; and 20 weeks at age 90.
Senior advocacy groups, organized labor and progressive
organizations have gone into full battle mode on this issue.
They are feeling double-crossed by the Administration following
a meeting with the President, Vice President and numerous other
top officials just after the election, who promised that Social
Security wouldn’t be part of any fiscal cliff deal.
“We were told Social Security was off the table, and that
whatever happens will be on a different timeline from the fiscal
cliff negotiation,” says Max Richtman, president of the National
Committee to Preserve Social Security and Medicare.
The chained CPI move also comes after candidate Obama said
that Social Security (and Medicare) are “bedrock commitments
that America makes to its seniors, and I consider those
commitments unshakeable” at AARP’s national convention in
September.
Vice President Joe Biden was just as emphatic during the
campaign, issuing a “guarantee” during a Virginia campaign
appearance last month that there would be no changes to Social
Security in a second Obama term. (Well, this is still
technically the first term, so I guess we’re still okay on that
promise.)
Richtman expects the Administration will attempt to soften
the chained CPI blow by exempting recipients of veterans’
benefits and Supplemental Security Income (SSI), a separate
program designed to assist very low income and disabled people.
The plan also will contain a bump in benefits for seniors over
85 that would lessen the impact of compounding.
“But not everyone lives to 85,” Richtman says, “so if you
don’t make it to that age, this wouldn’t do you much good.”
The chained CPI could also face Republican opposition,
because it would be applied to inflation adjustments for tax
brackets in the personal income tax code — effectively serving
as a stealth tax hike by reducing tax bracket adjustments and
subjecting more of individuals’ earnings to higher tax rates
over time. That could generate $72 billion in revenue over 10
years, according to the Congressional Budget Office.
Still, the lion’s share of savings would come from benefit
cuts — $217 billion over 10 years. More than half of that —
$112 billion – will come from reduced Social Security COLAs.
That sure sounds like a whole lot of substitution of goods and
services.
Or, as a reader of an earlier column I wrote on this subject
commented: “Sure, when the price of steak goes up, people switch
to chicken. And when the price of chicken goes up, old folks
will switch to cat food.”
