On Using the Chained CPI for Social Security Cost of Living Adjustments (Dean Baker)

[chill_wind]

On Using the Chained CPI for Social Security Cost of Living Adjustments
by Dean Baker
7-8-11

On Using the Chained CPI for Social Security Cost of Living Adjustments
by Dean Baker

There has been considerable discussion of basing the Social Security cost of living adjustment (COLA) on the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) as a "painless" way of generating large budget savings. This view reflects serious confusion about what the switch to the C-CPI-U involves. (The switch would also lead to higher tax revenue by slowing the rise in the bracket cutoffs.)

While it is often claimed that this switch will make the COLA more accurate, this is not clear. What is certain is that the switch would lower benefits. The research on the C-CPI-U shows that the switch would reduce benefits by roughly 0.3 percentage points a year compared with the baseline. This means that after someone has been retired for 10 years, their benefits would be 3 percent lower. After 20 years of retirement, their benefits would be 6 percent lower and people living into their 90s and collecting benefits for more than 30 years would see a drop in benefits of more than 9 percent. This might be especially difficult since the oldest of the elderly also tend to be the poorest.

This is a benefit cut that would hit current retirees, most of whom are not especially affluent. More than 90 percent of beneficiaries have non-Social Security incomes of less than $40,000. In addition, the Joint Committee on Taxation recently estimated that by 2021, 69 percent of the higher tax revenue gained from switching to the C-CPI-U would come from taxpayers making less than $100,000. By contrast, President Obama has set a $250,000 floor on the households whom he would subject to tax increases.

more: http://mrzine.monthlyreview.org/2011/baker080711.html

[Faygo Kid]

1. The chained CPI is a cut to benefits. Assumes seniors would switch from hamburger to cat food.

That's really it, isn't it? It's a stupid and fraudulent manipulation of the CPI to assume that people adjust their spending habits, like going from steak to hamburger to catfood, to adjust to inflation. There has been no adjustment in Social Security payments in TWO YEARS to account for inflation, and does anyone think that costs really haven't gone up?

How about bringing up billion-dollar hedge fund managers' taxation rates to what some average person who makes $45,000 a year has to pay instead? What kind of a nation do we live in?

[juajen]

3. A pretty sorry one right now, unfortunately. Too bad a lot of us have

no place to go. I'm tired of fighting and getting nowhere.

[Faygo Kid]

4. I hear you. I have lost my fight. I just want to crawl to a modest retirement.

My significant other turns 60 this week, and I'm right on her heels. She lost her job 18 months ago after a lifetime of achievement and through no fault of her own, and of course, don't even ask if someone her age can find a job. She has built a little business through hard work where she makes one-fifth what she made before with no benefits. Luckily, I'm employed and have her now on my benefits. We're lucky. But I have no illusions.

I know where I want to be. I fought like hell for civil rights, against the war, and for candidates I believed in through the years. Now we are governed by an elite few, and while one party is totally mad, most Dems are also unwilling to stand for us. I hope for good health and a few years without having to work in the place that I desperately long to return to. That's about it. The fight is gone.

[awoke_in_2003]

8. in many ways...

I am glad my wife is 10 years older than me. With her health conditions, I will likely out live her. So, I should be able to provide for her for the rest of her life. My retirement plan looks bleak- either dying on the job, or taking a Harley off the Grand Canyon while firing a flare into the gas tank. The second one sounds more appealing (and more memorable to all those who witness it :) )

[dkf]

10. Hamburger to cat food? Seriously?

Get a grip dude.

[w4rma]

14. The poster is exactly correct. *You* get a grip, dude. (nt)

[Bluenorthwest]

2. Chained CPI is a cut

To say otherwise is a lie, which of course makes it more appealing to certain politicians, who seem to get off on hypocrisy.

[jtuck004]

5. Meow. n/t

[chill_wind]

6. Friskees or Nine Lives? n/t

[jtuck004]

7. Ahh, the land of choice... n/t

[bhikkhu]

9. This is another misreading of the data

It says. for instance: "This means that after someone has been retired for 10 years, their benefits would be 3 percent lower."

To be accurate it should say: "This means that after someone has been retired for 10 years, the COLA adjustments would be 3 percent lower."

Its a fine point, and to most people reading it probably doesn't matter - less is just less, after all - but it is the difference between a few cents and a few dollars on a given amount. If you read someone say "this is a huge cut!", its probably that they have misunderstood it in this way, or read something written by someone who has misunderstood it.

Its worse that its here, in an article supposedly explaining things.

[chill_wind]

11. Dean Baker doesn't have a reputation for misreading the data.

So far you haven't liked any source's data that I noticed. "Less is just less, after all" is an interesting minimization for those already living on next to nothing. What constitutes a little or a lot as felt in different people's circumstances is a whole other issues-filled conversation, but there is little contention (unless you're some of the lawmakers Pelosi has alluded to, or like to reason like WAPO has been known to do) that this is a cut.

What's not in dispute at all is social security's contribution to the budget deficit. Where are cuts to the rocketing Pentagon spending? We bailed out the damned banks. Military spending is bleeding us dry. Trying to partially balance the budget on the backs of seniors in this manner- whether it represents a little or a lot- one damn dime, really, is unsupportable.

Hey Stupid Seniors! The Post Says a 9 Percent Cut In Social Security Benefits Won't Hurt

Friday, 27 May 2011 05:16


It's amazing what you can learn reading the Washington Post. Today it's lead editorial told readers that reducing the annual cost of living adjustment for Social Security by 0.3 percentage points won't hurt. This would come as news to most seniors who rely on Social Security for most of their income.

This 0.3 percentage point cut is cumulative. After a person has been retired for 10 years benefits would be roughly 3 percent lower than would otherwise be the case. Benefits would be almost 6 percent lower after 20 years, and almost 9 percent lower after 30 years, when most beneficiaries will be in their 90s.

The poverty rate is highest for the oldest seniors, most of whom are women living alone. Most people think cutting benefits for this group by 9 percent would hurt, thankfully we have the Washington Post to tell us otherwise.

(This is a newspaper that has run front page stories warning that raising taxes by less than 1 percent on people earning $300,000 a year would inflict real pain.)

http://www.cepr.net/index.php/blogs/beat-the-press/hey-stupid-seniors-the-post-says-a-9-percent-cut-in-social-security-benefits-wont-hurt

[bhikkhu]

12. Nevertheless, its a significant mistake

It has been pointed out elsewhere as well. In the segment you quote from, again, it should read "COLA increases would be almost 6 percent lower after 20 years" instead of "Benefits would be almost 6 percent lower after 20 years", and so on.

The change being discussed is a different formula for calculating the cost of living increases, which are supposed to increase the total benefit payments. Using the chained-CPI formula reduces the increases slightly - it doesn't reduce the benefit that the increase goes to at all.

In any case, social security has no contribution to the budget deficit - its not even a part of the calculation. Medicare I don't know that much about, but I know that Social Security was set up on its own balance sheet. Maybe changes to Medicare would affect the budget deficit, but, as you say, that's a rotten way to go when corporate profits are so high, the rich are getting richer, and global war is fully-funded.

[chill_wind]

13. Dean Baker helped Ted Kennedy protect SS and got this off the table in Congress

once before under Clinton.

Hat tap to dKOS priceman for the lead and the TPM link. (It refers to a rather misleading original diary, which you can read at KOS for yourself, and I'll not say more than that.)

"There is a very flawed rec list diary on the rec list which not only got its math wrong and forgets what compounding is, but if you read the beginning it talks about inflation being overstated since the 1990s.

(snip)

As you will see shortly after the Liberal Lion's death, Dean Baker reminded us of the importance of Ted Kennedy's work protecting SS from this kind of garbage analysis as he invited Dean Baker to Congress to testify about it:"

http://www.dailykos.com/story/2011/07/07/992235/-Kossacks-Dishonor-Ted-Kennedy-on-the-Rec-List-to-Defend-Obama?via=siderecent#c40

Kennedy's Quick Win for Social Security

By Dean Baker - August 26, 2009, 12:10PM

I first met Ted Kennedy in the fall of 1995. The context was truly bizarre.

Alan Greenspan had testified to the Senate Finance Committee in the fall of 1994 that the consumer price index (CPI) overstated the true rate of inflation. He told the committee that if it lowered the annual cost of living adjustment (COLA) for Social Security to correspond to the true rate of inflation, rather than the CPI, it could largely eliminate the budget deficit.

Greenspan told the committee that the gap was between 1-2 percentage points annually, so that after a decade, his plan would cut annual Social Security payments by more than 10 percent. And, the great thing was that Congress could do this cut by claiming it was just a technical adjustment.

Over the next half year, the idea of changing the COLA for Social Security gained considerable support in Congress from both parties. (Daniel Moynihan was the strongest proponent.) There was also support for the idea in the Clinton White House.

In this context, I was invited to talk to Senator Kennedy and his staff about the CPI, since I was one of the few economists who disputed the claim that the CPI overstated inflation. I was very happy when I got to his office to see 5 senior looking staffers. I assumed that these were the people that I really had to convince and I focused my attention on them, only occasionally looking back at Kennedy to avoid appearing rude.

more: http://tpmcafe.talkingpointsmemo.com/2009/08/26/kennedys_quick_win_for_social_security/

He ended up giving Committee testimony. Baker has given expert testimony to Congress on economic policy issues many times. He gives all the credit to the Sen Kennedy for the outcome, but I think progressives are lucky to Dean Baker in our corner, just as he was then, at that critical time.

The ensuing discussion again went all over the place with Kennedy largely remaining silent. However, at the end of the debate, the CPI adjustment was off the table.

I was tremendously impressed. Kennedy had gotten exactly what he wanted on both issues and he never broke a sweat. He framed the debate and just let things run their course. It was truly masterful.

(bold emphasis mine)