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Chained CPI to massacre benefits?

By Barbara Whelehan · Bankrate.com
Friday, July 22, 2011
Posted: 4 pm ET

It's hard to keep up with Washington's progress (or lack thereof) on talks about the debt ceiling limit, so I asked Bankrate's tax blogger Kay Bell for the latest news. She said the meeting is down to two people at the moment: President Barack Obama and House Speaker John Boehner (R-Ohio). I asked her if the proposal introduced Tuesday by the "Gang of Six" was still on the table.

"Everything is still a possibility," she says. "They're trying to prevent leaks but there's likely some Frankenstein work going on (with Obama and Boehner) trying to put parts of various proposals into a measure that can pass."

One of the gang's ideas is to change the calculation for inflation. Instead of using the consumer price index, or CPI, the proposal calls for using the "chained CPI." This would apply to how cost of living adjustments to Social Security are calculated, and it would affect other tax provisions.

Chained CPI?

On NPR's Marketplace the other day, Robert Greenstein of the Center on Budget and Policy Priorities explained that the chained CPI is identical to the regular CPI in every respect except one. It takes into consideration that the consumer, faced with higher beef prices, might switch to buying chicken. Because consumers tend to save money by substituting a less expensive product, their costs rise more slowly than they would otherwise.

Proponents for implementing this index call it a "technical" improvement that would be minimal in the beginning, but grow more significantly in the long term.

To illustrate, Greenstein said someone receiving $1,000 per month from Social Security might get a COLA increase to $1,027.50 instead of $1,030 per month.

Hmm, you might think. What's the big deal?

Adds up over time

But detractors say it really is a big deal because over decades, the change in calculation adds up to a lot of money. Blogger Richard (RJ) Eskow calls it "Washington's latest gimmick for tricking voters and cutting their hard-earned benefits to protect the wealthy."

The National Women's Law Center opposes the idea in a report issued last month. The paper's main premise:

"Shifting to the chained CPI would mean a cut in Social Security benefits for current and future beneficiaries, compared to the benefits they would receive under the current COLA. The cut would grow deeper the longer an individual received benefits, making this cut especially painful for women who have longer life expectancies, rely more on income from Social Security and are already more economically vulnerable than men."

The report illustrates in several ways how this seemingly innocuous change in the inflation index would affect different demographic segments of the population over time. As an example, a single elderly woman earning the median monthly benefit of $1,100 would lose a cumulative benefit of $6,364 by age 80; $15,121 by age 90; and $19,624 by age 95, according to the report.

In fact, the CPI itself is an inferior index to use because it's based on the CPI-W, or the budget of an average consumer. A better index for people in retirement would be one based on the CPI-E, a consumer price index created for older individuals which better captures the increased amount that older people spend on health care. I wrote about that index a few years ago in a column called "Inflation under suspicion."

Bell says the chained CPI is a bad idea. "Don't hurt the old people," she says, "especially those who rely on Social Security for 100 percent of their income." Of course, Bell is biased. She has a 76-year-old mother who relies totally on Social Security and watches her already struggling with the choices cited by chained CPI advocates.

What do you think? Should current and future retirees make this sacrifice to help get the country out of debt? Or is this just plain unfair for the most vulnerable segment of the population?

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5 Comments
wm burke
August 19, 2011 at 2:11 am

rep.or dem. there all in it for them self's. if they had a mother
that's on ss, bet they'd sing a diffrent song.(should they not be able to help)
of cours, they have it all figure,it does'nt effect them they have there own ret plan and even give them self's a raise, for
doing such a lousy job, cause they work so hard, and not getting a
vacation,when they want one, (that will be voted on next)

Ryan
July 26, 2011 at 11:01 am

OMG, social security hasn't been put into a lockbox or whatever nonsense people have been saying for a while. SS revenues have been in the general fund since Johnson. There's just a tiny drawer with non marketable treasury deposits inside for 3 trillion dollars. This means that now as social security is actually starting to draw down these securities they have to come from the treasury like any other spending since there is no actual savings.

Oracle McSnackers
July 24, 2011 at 12:53 am

The money I pay into Social Security goes to current retirees. The money I will receive from Social Security will come from current taxpayers. There is no guaranty that what I receive will be commensurate with what I paid in. In fact, the demographic realities make it impossible for Baby Boomers to receive as much from their children as they are giving to their parents. Get use to it. Social Security (and Medicare) benefits will be reduced.

Anne
July 23, 2011 at 12:33 pm

I am an 81 year old woman, and invested in various Janus mutual funds about 20 years ago with monthly contributions to the funds. Several years ago I stopped the contributions but still have the accounts, which total approximately $223,000. I'd like to sell all my shares and put the money into several Certificates of Deposit. I have Social Security income, as well as some investment income in Germany, where I live. My son lives in the U.S. and is on the Janus accounts with me, so he is able to take care of my requests as needed. When I sell the shares, is there a way to determine an approximate amount of a penalty I will pay?

OMG
July 22, 2011 at 5:35 pm

DO NOT EVEN THINK ABOUT USING "CHAINED CPI"
1. Social Security had nothing to do with the governments financial problems. If the money paid into Social Security over the years had been kept in a separate fund there would be so much money in that fund that Social Security could go on forever. Just like money put into scholarship funds, etc. The principal earns so much money it prevents depletion of the fund. AND THIS IS WHAT SOCIAL SECURITY WAS BASED ON. Not so that they could raid the money contributed!
2. Right now the CPI does not even include FOOD or GAS/OIL, and there has been no increase in Social Security for three years even though everything else, including FOOD and GAS/OIL as well as housing costs, including taxes, utilities, etc., have continued to increase! With Chained CPI there will be people who are left with nothing - not even to account for what they paid in.
3. This will mean nothing to those who do not need Social Security, either because of pensions and free health care, or earnings, etc. But, to those who do not have these funds due to whatever reason, it would be a calamity - they would end up getting nothing, not even what they paid in, especially if they died early on.
4. President Obama has now spoken. He has put all the blame about everything on the Republicans! He has even said things that are in error. The Gang of Six plan, which he embraced, thought up the Chain CPI. These are people who do not depend on Social Security, yet they, BEHIND CLOSED DOORS, decided this for the American people (they take it away from those who specifically need it.) He is now saying how great they all are, because of all they have done....DUH! whereas the Republicans are the BAD guys???