Friday, July 8, 2011

Chained CPI—Is it just a stealth way to cut Social Security benefits?

I said in a previous post  that the idea of switching the method for calculating Social Security Cost-of-Living (COLA) from the CPI-W to the Chained CPI (C-CPI-U) was controversial.  [See here.] While proponents argue they are just trying to use a more accurate index for calculating COLA, opponents say the switch is nothing more than a stealth way raise revenue on the backs of retirees by cutting benefits. 

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), voiced the concern that many have about this proposed switch in a post today.

"While it is often claimed that this switch will make the COLA more accurate, this is not clear. What is certain is that the switch would lower benefits. The research on the C-CPI-U shows that the switch would reduce benefits by roughly 0.3 percentage points a year compared with the baseline. This means that after someone has been retired for 10 years, their benefits would be 3 percent lower. After 20 years of retirement, their benefits would be 6 percent lower and people living into their 90s and collecting benefits for more than 30 years would see a drop in benefits of more than 9 percent. This might be especially difficult since the oldest of the elderly also tend to be the poorest.

"This is a benefit cut that would hit current retirees, most of whom are not especially affluent. More than 90 percent of beneficiaries have non-Social Security incomes of less than $40,000. In addition, the Joint Committee on Taxation recently estimated that by 2021, 69 percent of the higher tax revenue gained from switching to the C-CPI-U would come from taxpayers making less than $100,000.  By contrast, President Obama has set a $250,000 floor on the households whom he would subject to tax increases.
"Near retirees are not likely to fare better. Among older baby boomers (ages 55-64)  median wealth is just $170,000, including home equity. Given that this crisis stems from the failings of the financial sector, it seems peculiar that Congress and President Obama may arrive at a budget deal that imposes a considerable burden on retired workers, but asks nothing from Wall Street.

"It is also worth noting that there is no basis for the claim that the C-CPI-U would provide a more accurate COLA for Social Security beneficiaries. The Bureau of Labor Statistics' (BLS) Experimental Price Index for the Elderly has consistently shown a somewhat higher rate of inflation for the elderly population.

Baker makes the perfectly reasonable suggest that “the BLS construct a full elderly index that could take account of actual purchase substitution patterns among elderly consumers.”  Makes sense to me.

Read Baker’s full post here:

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