The chained CPI: Budget treachery

Here’s something really scary for Halloween: the plan being pushed in the budget super committee by Alice Rivlin, Alan Simpson and Erskine Bowles to cut Social Security benefits by changing the way inflation is measured. Any member of Congress who goes along with this plan will deservedly be as popular as a vampire at a blood drive.

Retirees living on Social Security are mostly just scraping by. The average retirement benefit is only about $14,000 a year in 2009, and most retirees depend on Social Security for half or more of their incomes. Knowing how tight their budgets are (and their proclivity for voting), Democrats and Republicans alike have promised not to cut the benefits of people nearing retirement, not to mention the benefits of people who have already retired. Yet the only way the inflation measure can reduce the deficit over the next 10 years is by cutting Social Security cost-of-living adjustments for current and near retirees.

The members of Congress who want to make this benefit cut don’t want to admit they’re breaking their promises to retirees. So they disguise the cuts as a technical change—an improvement in the cost-of-living measure. That’s hogwash. The alternative index they propose for the Social Security COLA is not an improvement over the current measure; it’s almost certainly a worse indicator of the rising cost of living faced by seniors. And there’s nothing technical about its expected effect on retirees’ checks. The COLA reductions it will cause will cost the average retiree about $1,700 a year by 2031.

Social Security’s annual cost-of-living adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Ironically, the CPI-W measures changes in the cost of living for workers, excluding retirees and other Social Security recipients who aren’t in the labor force. This measure doesn’t accurately reflect the cost of living for seniors. Seniors have experienced higher inflation because they spend a greater share of their incomes on out-of-pocket medical expenses, and health costs have risen faster than overall inflation in recent decades. An index that specifically tracks the cost of living of seniors has risen roughly 0.27 percentage points faster per year than the CPI-W.

The rationale for the change the super committee is contemplating is that the current price index overstates inflation because it doesn’t fully account for the ability of consumers to change their buying habits in response to price changes. In other words, if the price of oranges goes up, people will buy more apples and fewer oranges, and this change isn’t fully reflected in the CPI-W even though the consumption “basket” evolves over time to put more weight on apples and less on oranges.

The problem with this argument is that it doesn’t look at the growth in the costs actual retirees face over time. Not only are seniors harder hit by escalating medical costs than the working-age population, but since they have roughly half the household incomes, they spend a greater share on necessities like rent and utilities. It’s likely that the CPI change advocated in the super committee will understate inflation in the goods and services the elderly mostly purchase, and it may actually overstate their ability to change consumption habits in response to price changes. No one disputes that it will lead to benefit cuts that start small but compound over time.

Benefit cuts are justly unpopular across the political spectrum—especially cuts that affect retirees and near-retirees. But Republican members of Congress have a double problem. The CPI change would affect income taxes, too – not just Social Security and veterans’ benefits. How does anyone who took a no-tax-increase pledge defend voting for a “technical change” that will raise $72 billion in taxes by 2021 on tens of millions of Americans? They might be tempted, since there will be nearly $2 of Social Security cuts for every $1 of increased tax revenue. But at the end of the day a vote for the CPI change will feed the disgust of Tea Party types as much as progressives and liberals.

  • Mary

    the real question for our economy is “how long are we going to keep hollowing out our most important social institutions before they start (started already….) imploding?  

    We have short cut our physical infrastructure and have learned to accept failing bridges, dams, and highways; we have transferred the burden of investing in higher education to the people who will begin their careers with mortgages that crowd out their ability to buy homes; just as they begin families, they will face ever ballooning health care bills with incremental changes intended to “make them think before mindlessly consuming unnecessary health care”; they will be scolded for not saving enough for their retirement and encouraged to abandoned the old public social security model for stalwart independence and the right to make a killing in the stock market.  

    I say enough!   

    Our Emperor has become a selfish, self sufficient “patriot” who believes he is special by divine right; he sees his nakedness as a benefit to all who gaze upon him and believes he is acting as a rational and contributing member of our society.  He knows he is naked but believes his form of nakedness is a civic virtue.  He believes shame is what belongs to the weak, the halt, and the helpless; indeed it is those problems that confer shame on them. Disdain and shame are the lot of the parasitic poor, the useless  young, the improvident sick, the sheep like victims of the Enrons and their progeny.  And what about the jobless rates for our returning veterans who find that the cheering stops when they apply for jobs and there are none?  Don’t forget the Emperors of greed had better things to do than actually serve in the armed forces! They were too busy manipulating the massive shift of wealth from the poor and middle classes to the present obscene concentration of wealth and privilege to see the damage done to our social fabric.  How long can this economy and this society ignore the plight of our working and middle classes before it collapses like another Enron?  The conditions we accept for millions undocumented workers living in the shadows and silently enduring abuse for the crime of existence are our “canary in the mine” and anticipate conditions that will become increasingly routine in our workplaces.   We are on the poorly maintained highway leading to a world of cheap, uneducated, and poorly nourished disposable second class human beings.

    What have we become?   What would that old autocrat Henry Ford say about the economy when the average worker is becoming less and less likely to buy a new car?  

    This is not a Republican or Democratic Party issue; it is an American issue. Instead of addressing problems we are well aware are out there, we are pointing fingers and chanting nasty little mantras ….”Class warfare”; “Political bias”; “illegal human beings”, “anchor babies”, “terrorists”; “greedy business owners”; “socialists”; and on and on…..

    This is masking the real problem: we have lost our sense of responsibility to build our nation and increase our capacity to grow and prosper.  Instead, we have been using up our invested capital and have been drawing down on our national strengths to enjoy the present.  We wont solve this with marginal shifts in tax and income policy; we need a national commitment to a Marshall Plan for our own country that genuinely reverses the losses in education, medical care, income, social institutions including the family, and returns us to a whole hearted commitment to the common good of all our people.  We need a national commitment to what made us a special people long ago – that we do hold sacred the inalienable rights to life, liberty, and the pursuit of happiness.     

  • Cornelia Strawser

    I agree 100% with Eisenbrey that the chain CPI is wrong for most seniors (excepting the most affluent) but like the idea of using it for income tax indexation where it is appropriate.  If using the chain for Social Security is included as part of a grand bargain, it should be accompanied by funding the BLS to produce a chain index specifically for seniors, based on the actual consumption patterns of modest-income seniors.

  • marvinmcconoughey

    The present retiree population may go down as the richest ever achieved.  The $14,000 average social security payment makes its recipients very well off compared to global income averages.  And it is on this planet that we live and die. A prudent reining in now of social security helps keep in solvent and viable in future years when the ratio of recipients to workers will be even higher than now.  I am a social security recipient.

  • RTGreenwood

    This article is right on the money.  Chained CPI is a hoax.  If apples increase 1% and oranges increase 0%, then the consumer switches to oranges.  The next month, oranges increase 1% and apples increase 0%, then the consumer switches back to apples.  SO at the end of two months, both apples and oranges have increased 1% but the consumer gets a 0% COLA increase.  RIDICULOUS.

    Inflation has nothing to do with consumer behavior.  It has only to do with a price presented to the market and is that price paid by the market.  Any CPI must establish a basket of goods and services and track those prices.  The only substitutions that can occur is an amount of one good or service for the exact amount of another good or service.

    You can lie about inflation but the free market forces persist and await a day of reckoning.  These politicians and their like still think they can subvert sfree markets.  Alan Greenspan thought he could subvert the free market and as a result of his inevitable failure, he will be judged the worst Fed chairman ever.