Fiscal Cliff: Alternative or “chained” Consumer Price Index & Social Security

SOURCE: SSA.gov

ANALYSIS:

Earlier this week, the White House proposed cutting Social Security spending by adjusting how the government calculates cost-of-living increases for seniors.

In an effort to strike a deal with House Republicans to avert the fiscal cliff, President Barack Obama offered to slow the growth of Social Security benefits by calculating the Cost-of-Living Adjustments (“COLA”) using an alternative Consumer Price Index or “chained CPI”. 

Read more: Overview of the White House’s counter-offer to avert the fiscal cliff

The cost of living adjustments are supposed to help seniors keep up with the rate of inflation or the increase in prices of goods and services over time. For example, a retiree with a yearly income of $10,000 5 years ago will need $11,103.44 today (an 11% increase) to maintain the same standard of living.

Currently, the Social Security Administration (SSA) calculates the periodic cost of living adjustments using what’s known as the Consumer Price Index for Urban Wage Workers (or “CPI-W”).

The President’s proposal to use the alternative or “chained” CPI instead will significantly reduce benefits for Social Security recipients over time.

Unlike the current CPI-W, the chained CPI factors in “the ability of consumers to substitute goods or change purchasing outlets in response to relative price changes” from inflation. To put it another way, the chained CPI calculation assumes that people will buy the cheaper version of a product in response to price increases. One example would be switching from a $5 brand name toothpaste to a generic brand that costs $4.

Thus, calculating the cost of living adjustments using chained CPI will result in smaller benefit increases than the current CPI-W formula.

According to the Social Security Administration, using chained CPI will reduce annual benefits by 2.9% for men and by 3.9% for women (who tend to live longer than men). Seniors who live past 90 years old will see about a 10% benefit cut under the chained CPI calculations.

“The chained CPI, if it’s implemented, will further reduce benefits. A woman who retires at age 65 living ’til age 75 will get a benefit of about $600 less in real dollars 10 years later at age 85, about $950 or so less at age 95 – if she lives so long – it would be roughly $1,400 less than it would have been if the chained CPI is put into effect,” said Dr. Eric Kingson, Professor at Syracuse University School of Social Work and Co-director of Social Security Works, in his testimony before the Senate Committee on Health, Education, Labor, and Pensions on Oct. 18, 2012.

It’s also important to note that chained CPI does not account for increases in health care costs for seniors. In fact, even the current CPI-W cost of living increases can’t keep up with rising health care costs. The Social Security Administration admitted that the 1.7% COLA increase set to take effect next year will be “partially or completely offset by increases in Medicare premiums.”

Social Security’s primary objective is to keep seniors out of poverty, but even the SSA’s own analysis concluded that switching to chained CPI will likely increase poverty rates for seniors, particularly elderly Americans, African-Americans, and those with lower educational attainment and earn less in wages.

 

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