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.
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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