"Chaining" inflation gauge would hurt Social Security

recipients
News Analysis
(MoneyWatch) Among the policies lawmakers are considering as part of the "fiscal cliff" talks in
Washington is to change how the government measures inflation in Social Security payments.
President Barack Obama has proposed adopting what is known as a "chained" Consumer Price
Index, or CPI, as part of his low cost business ideas plan to reduce the nation's deficit and raise
revenue through an income tax hike wealthy Americans.
Advocates contend that this approach is a relatively painless way to shrink the government's budget
gap and to shore up the federal retirement program, which they contend is financially troubled. But
liberal lawmakers and pundits have panned the idea, arguing that it would steps to starting a
business result in lower benefits for Social Security recipients, millions of whom depend on the
program as their main source of income.
What does chained-CPI mean?
The government currently calculates Social Security's cost-of-living adjustment, or COLA, each year
based on how inflation affects urban wage earners and clerical workers. Known as CPI-W, this index
measures changes in the prices of a fixed basket of goods that are deemed to be representative of
regular purchases by wage earners.
In contrast, the chained-CPI assumes that as prices increase, consumers make substitutions in what
they purchase. The common illustration is that if the price of beef increases but the price of chicken
is stable, consumers will purchase less beef and more chicken.
The chained-CPI is being proposed to adjust not only Social Security benefits, but also benefits from
a host of other federal programs, such as federal pensions, veterans benefits and Supplemental
Security Income (SSI). It would also be used to index future increases in tax brackets. This last item
is particularly important because if tax brackets rise at a slower rate, then federal tax revenues will
increase, also helping to reduce the low cost business ideas deficit.
The Bureau of Labor Statistics estimates that for the past decade, the chained-CPI increased at an
annual rate that was about 0.33 percent lower than the CPI-W. The Congressional Budget Office
estimates that in future years, increases in the chained-CPI might be 0.25 percent lower each year
than increases in the CPI-W.
Based on the CPI-W, the Social Security COLA was zero for both 2010 and 2011, 3.7 percent for
2012, and will be 1.7 percent for 2013. The average dollar increase in Social Security next year will
be about $21 per month; it would have been about $17 per month if Social Security had based the
increase on the chained-CPI.
Earlier this year, the CBO estimated that if the federal government had moved to the chained-CPI on
Jan. 1 2012, it would save more than $220 billion over 10 years. The net savings would be
considerably lower if Congress adopts measures to soften the blow to the most vulnerable Social
Security recipients.
Who would be hurt?
In general, people who would be negatively affected by the use of the chained-CPI would be retirees
and other beneficiaries who receive most of their income from Social Security and who aren't in a
position to switch to other goods and services when prices rise.
For example, Medicare premiums and out-of-pocket medical expenses take up a large share of many
retirees' budgets. Many retirees have no alternative to Medicare, so for these people the only
"substitution" for medical care paid under the program is to go without it.
With Social Security, one reason that's a concern is that millions of seniors depend on the program
just to get by. According to the Social Security Administration, 86 percent of U.S. households with
one member aged 65 or older, or nearly 39 million Americans as of the end of 2011, receive Social
Security benefits. For these households, Social Security income represents the largest component of
their total income, at 37 percent, followed by wages at 30 percent.
You might think, what's the big deal if 37 percent of a retiree's total income grows at a slightly lower
rate? But averages can be deceiving.
According to government statistics, median income for people over age 65 is roughly $20,000 a year.
Social Security provides at least half of total household income for 65 percent of all aged
beneficiaries. And for non-married beneficiaries, that figure rises to 74 percent, or nearly three-
quarters of their income.
For more than a third of of all older beneficiaries, Social Security provides 90 percent or more of
total income, while for non-married beneficiaries that figure rises to 46 percent. These are the
people who would suffer most under a chained-CPI, a group that encompasses more than one-third
of all Social Security beneficiaries and almost half of all single participants in the program, many of
whom are elderly widows.
Nine percent of the elderly population have incomes below the poverty line, while another 5.7
percent are defined as "near poor," with incomes between 100 and 125 percent of the poverty lines.
So a total of nearly 15 percent of Americans considered poor or near-poor. This percentage is 7.3
percent for all married people, 21.9 percent for single men, and 24.8 percent for single women.
These figures are even higher African-Americans and Hispanics.
Let's take a quick look at one aspect of the substitution issue. The average monthly benefit for new
retirees in 2011 was $1,241. In 2011, the Medicare Part B premium for most new retirees was
$115.40 per month, representing almost 10 percent of their monthly check. That's for single
retirees; the percentage increases to over 13 percent for married retirees. And that's not even
counting out-of-pocket medical expenses.
There's no way to substitute for Medicare premiums, and it's difficult to substitute for out-of-pocket
medical expenses. In other words, paying for these premiums and expenses represents a real
financial hardship for the one-third of aged beneficiaries around the country for whom Social
Security represents almost their entire income.
The bottom line: The elderly poor, singles, widows, widowers, and non-whites will be most negatively
affected by shifting to a chained-CPI approach to calculating Social Security cost-of-living
adjustments. If you count just those retirees whose Social Security benefits represent 90 percent of
their total income, that's over 13 million Americans.
Asked what the Obama administration would do to these retirees, White House Press Secretary Jay
Carney said last week that the "oldest of Social Security recipients would be potentially protected
from the impact of a change like this." He declined to offer details.
Possible fixes
The Simpson-Bowles recommendations on Social Security attempted to soften the impact on the
elderly poor by proposing a minimum Social Security income. If your Social Security income as
increased by the chained-CPI fell below this minimum income, then you'd be paid this minimum
income instead.
Another possible fix would be to continue using the current COLA for the Supplemental Security
Income program, which provides additional support to impoverished elderly, disabled and blind
people.
It's not clear if and how a minimum benefit under Social Security or exemptions for the SSI program
might work their way into the fiscal cliff negotiations. Any of these fixes impose a "cost" by reducing
the savings how do I start a business in the federal budget.
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