New Stealth Proposal to Cut Social Security--Chained CPI

Washington politicians are currently wrangling over the debt limit and we're hearing a lot about deficits and cuts. Most of these same politicians promised voters over the years that they would not cut Social Security or at least not cut the benefits for current Social Security recipients. IL-10 Rep. Bob Dold fell into the latter camp assuring seniors during his 2010 campaign that he would not cut their benefits even though he is interested in cutting or even ending Social Security over the long term.

However, a new proposal attached to the debt limit negotiations will allow Dold and his fellow members of Congress to cut Social Security for current beneficiairies and everyone else while claiming they didn't.

The new proposal is to change the way the Cost of Living Adjustment  (COLA) is calculated. It's called Chained CPI.

The idea of COLA is to protect the purchasing power of people reliant on Social Security to live. Protecting purchasing power also helps keep the economy flowing, so it's not just a benefit to the recipient, but to everybody.

COLA is calculated based on something called CPI, the Consumer Price Index. There are several CPI calculations used for different purposes. Social Secuirty COLA has is based on CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers. It is arguable that CPI-W is not a terribly accurate index for purposes of calculating Social Security COLA because it's not directed to the segment of the population that receives Social Security. CPI-W does not factor in health care cost increases. CPI-E would be a better basis for COLA because it is the factor for people age 62 and over, but is not favored in Washington because it is based on a relatively small sample of people.

The Bureau of Labor Statistics has been trying to calculate CPI is ways it claims are more accurate by taking into account consumer behavior as prices increase. There are two ways in which CPI tracks consumer behavior along with inflation. One form tracks consumer product substitution over similar products (ie. Ice Berg head lettuce is cheaper than is Bib or Boston. It's probably less nutritious too, but who cares about that). Another method of tracking consumer behavior along with inflation is Chained CPI. Chained CPI tracks consumer product substitution over dissimilar products (ie. if you cannot afford the vacation, you might buy more food to bar-be-que at home).

Now, as part of the debt limit discussions, many are advocating tying Social Security COLA to Chanied CPI. This change is being marketed as a simple technical change that will make the COLA adjustment more accurate. However, it is not necessarily more accurate as its accuracy depends on the unproven notion that consumers maintain their standard of living by switching product categories. It seems to me that Chained CPI simply tracks the downward spiral of the American standard of living. I recently heard someone describe it this way, if you cannot afford food you replace that purchase with catfood.

In a recent report, the National Academy of Social Insurance concluded that Chained CPI is more of a benefit cut than the technical changes it's marketed to be. First, they found that it will slow COLA increases:

The Chief Actuary of Social Security estimates that the chained CPI will continue to rise about 0.3 percentage points more slowly per year than the CPI-W.7 A COLA that is 0.3 percentage points lower each year would produce a monthly benefit that is about 8.4% lower by the time a retiree reaches age 92. Similarly, an individual who begins receiving disability benefits at age 35 would receive a benefit that is about 8.4% lower by age 65. The chained CPI would thereby reduce Social Security outgo over the next 75 years by 0.5% of taxable payroll, about one-fourth of the program’s long-term shortfall.

Then, they found that the slower COLA increases do not reflect real reductions in prices as they affect the Social Security population:

The claim that a chained CPI would more accurately measure elders’ living costs is based on an assumption that the elderly can lessen the negative impact of price increases on their standard of living by changing their purchases to a similar extent as the general population. Yet the elderly, on average, have lower incomes and about 27% lower expenditures than other households, and more of their purchases are for necessities. No empirical evidence documents whether or not less affluent households – or beneficiaries in particular – are able to lessen the impact of price increases on their standards of living by shifting purchases across dissimilar categories to the extent that other households do.

Basing Social Security COLA on Chained CPI ensures a race to the bottom for seniors. According to The Economic Policy Institute (EPI), even if Chained CPI is more accurate for calculating inflation in general, that does not hold for the Social Security recieving population which tends to purchase more necessities and therefore substitutes other products less. Social Security recipients also purchase health care in greater quantities and more consistently and health care spending is weighted too low in the Chained CPI.

CPI has also calculated that under Chained CPI, a hypothetical medium earner with an average annual benefit of roughly $18,204 in 2011 would collect a benefit that would be nearly $1,800 lower by 2031.

Several organizations have calculated the potential effects of the Chained CPI COLA reductions. The Strengthen Social Security campaign has calculated that the average 75 year old loses 12 weeks of groceries with the proposed change. It gets worse as a person grows older. The averge 85 year old loses 21 weeks of groceries while the average 95 year old loses 30 weeks. I guess some libertarian will argue that it's all ok because older people eat less anyway.

The National Women's Law Center has found that senior women will be disproportionally harmed by the proposal:

For women, shifting to the chained CPI is a triple whammy. Because women live longer than men, they face deeper cuts because the reduction from the chained CPI increases over time; because women are more reliant on Social Security than men, cuts to Social Security benefits are more painful to women; and, because older women are already more economically insecure than older men, cuts in Social Security benefits are more likely to produce serious hardship to women than men.

Many politicians have recognized that Social Security does not contribute to the federal deficit, and therefore, should not be on the table for cuts to reduce the deficit. Now, they're looking to make the cuts on the sneak by making what seems like, and what they adertise as, a small technical change to increase accuracy. Make no mistake. This proposed change is not small and it's not accurate. It's just a cut and a cut in spending power just when our economy needs more people with more spending power, not less.