The Chained CPI

A proposal to change the cost-of-living adjustment for Social Security benefits is a political trick, not a policy fix. Supporters of the chained CPI say it would lower costs and make the system solvent. Of course, it does so by cutting benefits.

The Chained CPI

Summary

In their relentless demand for spending cuts as part of their crusade to impose austerity on our economy, conservatives have fixated on cuts to benefits offered by Medicare, Medicaid and Social Security – the core pillars of family security.

One particularly noxious idea is the “chained CPI.” Conservatives like it because it would cut Social Security benefits immediately for everyone in the system – if we let them replace the more scientific index we have used for years to make sure benefits keep up with the cost of living. And some Democrats like it because it’s a way to give deficit hawks real spending reduction – while pretending it is simply a “technical fix,” not a benefit cut.

Obama administration officials have also argued that the chained CPI is a better index – and the president himself has offered it as part a “grand bargain” on deficit reduction.

Tremendous pressure to enact this change has been exerted by a powerful bipartisan array of Washington insiders and private groups funded by Wall Street advocates of Social Security retrenchment or even privatization. They seek to use the current deficits – the result of the economic collapse caused by Wall Street’s excesses – to force unpopular cuts in the security programs American families rely on. They do so by claiming that “entitlements” cause our long-term debt problems and that Social Security is going bankrupt without changes.

If their arguments prevail, the economic security of the elderly, disabled and surviving children will be needlessly compromised for decades to come by our country’s political elites.

Our Position

A “chained CPI” differs from the standard consumer price index we’re familiar with because it claims to take into account “substitutions” — the degree to which consumers will change what they buy in response to price increases. For example, if the price of going to the movies dramatically increases, consumers might instead rent more DVDs to save money. Now we all make substitutions – but many of the things seniors buy are things you just can’t substitute, like medicines, or doctors visits, or basic foods. But the chained CPI wasn’t designed with seniors’ buying habits in mind. Applying it to Social Security assumes seniors make the same substitutions as the average consumer, which they often can’t afford.

Here are seven reasons shackling seniors and the disabled with a chained CPI is just plain wrong.

1. It’s a huge benefit cut that seniors, veterans and the disabled cannot afford. It would cut benefits by $135 billion over 10 years and much more in ensuing decades as its impact is compounded. It would also cut another $24 billion from veterans’ and federal retirement benefits. The Social Security recipient who retired at age 65 in 2012 would be receiving $658 a year less in benefits under the chained CPI calculation by the time he or she is 75, an almost 4 percent cut; by 85, that person would be getting $1,147 less a year, a 6.5 percent benefit cut. This is a feature, not a bug; the budget savings from the benefit cuts are the key selling point of the chained CPI. These cuts would hit the oldest seniors the hardest, exactly when they are the most economically vulnerable, right when they are likely to have exhausted their retirement savings and are facing their highest out-of-pocket health care costs.

2. The chained CPI is patently inaccurate at measuring the cost of living of the elderly and disabled. This is a political trick, not a technical fix. Since 1975, Social Security benefits are adjusted annually based on what is now called the consumer price index for urban wage earners and clerical workers (CPI-W). Ironically, its cost calculations exclude people outside the workforce, and thus most Social Security beneficiaries. Recently, the government’s Bureau of Labor Statistics has developedan experimental CPI-E that more directly measures the cost of living of people age 62 and over. If the chained CPI were a technical fix, its advocates would be pushing to perfect the CPI-E and adopt it as the basis for Social Security’s cost of living adjustments. But the CPI-E indicates that the cost of living of the elderly is rising faster than that of the overall population.So adopting a true measure of seniors’ costs would increase benefits and cost more money. Advocates of switching to the chained CPI don’t want more accuracy. They invented the chained CPI to shackle seniors with lower benefits in order to cut spending.

3. The chained CPI violates Social Security’s promise: that Social Security’s cost-of-living adjustments should maintain the purchasing power of benefit levels over time. This is no minor detail. The value of pensions or 401(k) balances that are not inflation-protected typically decline by half over 20 years. Virtually no retirement savings vehicles available in private markets offer inflation protection for life. Social Security does. It is one of the program’s most important defining features. Given that the average benefit today is only $1,153 per month, that 36 percent of beneficiaries get 90 percent or more of their income from Social Security, and that 65 percent of Americans get 50 percent or more of their income from the program, this inflation protection is critical to recipients’ economic security. It’s just obscene to shackle seniors and the disabled to benefits that won’t keep up with rising costs. Faced with the soaring costs of drugs, seniors already are sometimes forced to cut back on food or on medicine to make ends meet. We should be raising benefits to alleviate those pressures, not cutting them because to reflect the savings they exact.

4. The chained CPI flagrantly flies in the face of public opinion. By a two-to-one margin in one recent poll, respondents said using the chained CPI was “totally unacceptable” as a way to adjust Social Security benefits. Other polls have found that overwhelming majorities of Americans are opposed to undertaking Social Security reform in the context of deficit reduction talks. The most recent polling by the National Academy of Social Insurance shows that a majority of Americans across the political spectrum think Social Security benefits should be raised, not lowered – and are willing to pay more in taxes to protect those benefits. By far the most popular reform is to raise the cap on the payroll tax, so that the wealthier Americans pay at the same rate as low-wage workers.

5. The chained CPI will hurt more than just the elderly. The groups of Americans that would also see their benefits cut if the chained CPI were implemented government-wide include people with disabilities; widows and children who receive survivor’s benefits; disabled veterans, particularly those who are totally disabled and therefore eligible for both veterans benefits and Social Security Disability; lifelong public servants who retire from the federal government, and anyone who retires from the military after serving our country for decades.

6. Social Security benefits are modest and should be increased, not cut. Social Security retirement benefits average just $14,900 a year, and nearly 5 million retirees live below 125 percent of the federal poverty level. Already their current cost-of-living adjustments do not compensate for the fact that they spend roughly twice as much on health care as the average worker or urban consumer and a larger percentage of their income on basic necessities. A chained CPI only makes that problem worse. The Center for Retirement Research at Boston College has estimated that more than half of the nation’s households would be unable to maintain their standards of living during their retirement years, given the damage the 2008 financial crash did to housing values, stock portfolios and worker earnings. Given our national retirement income security crisis, policymakers should be increasing Social Security benefits, not cutting them.

7. The advocates of the chained CPI implicitly admit that it is not an accurate measure of inflation faced by seniors. They are now scrambling to propose modifications that will “protect” the oldest and poorest seniors from the effects of a change they claim is technical. But if the chained CPI were an accurate measure of the cost of living, why would 80-year-olds need protection? In fact, the measures proposed to blunt the effect of the chained CPI on vulnerable populations are shamelessly inadequate. For example, even with the most commonly proposed compensatory measure – a bump-up in benefits after 20 years, starting at age 82 – an 85-year-old would still lose more than $12,000 in benefits over a 20-year period.

Message

The chained CPI is a political trick, not a technical fix. It is a hidden benefit cut that would shackle seniors with lower benefits and thus less security over time. With seniors in the bottom 40 percent of the income scale dependent on Social Security for almost 90 percent of their income, it would dramatically raise poverty levels among the retired, the disabled and the widowed.

Crossfire

When they say: The chained CPI is more accurate.

You can say: It is not more accurate for seniors and people with severe disabilities. As 250 top economists and more than 50 social insurance experts with Ph.D.s in related fields recently pointed out in an Economic Policy Institute statement: “Since elderly and disabled people spend a greater share of their incomes on necessities such as health care, rent, and utilities, and since this population is also less mobile, a chained COLA based on the spending patterns of workers or the general population may overestimate the ability of Social Security beneficiaries to take advantage of cheaper substitutes.” To obtain a more accurate cost-of-living adjustment, we should give the experts the resources needed to perfect the CPI-E (a consumer price index for elderly consumers) and then consider adopting it for determining Social Security COLAs. It would surely end up increasing rather than decreasing the adjustment for inflation.

When they say: If we reduced the COLA, wouldn’t that just slow the rate of growth of benefits rather than cut benefits?

You can say: Cost of living adjustments don’t increase benefits, they simply allow them to keep pace with inflation. A lower adjustment will result in benefit checks that have less purchasing power. This is a benefit cut masked as a technical fix.

When they say: Isn’t the chained CPI a relatively small cut?

You can say: The chained CPI snowballs year after year, so the cut is the largest for the oldest seniors who need it the most. For the average worker retiring at age 65 in 2012, the chained CPI would cut benefits by more than $1,000 a month by the time that worker is 85. The cumulative effect of the cut gets worse over time.

When they say: Can’t we make accommodations in the chained CPI to protect the most vulnerable people?

You can say: No. None of the proposed “sweeteners” to cushion the impact of the chained CPI on vulnerable groups holds them harmless – far from it. The proposed modest increase in benefits after 20 years (sometimes called the “birthday bump”) still leaves the average senior with a net cumulative loss of $12,000 by age 85 and over $16,000 by age 95.

When they say: The chained CPI is a necessary part of getting our deficits under control

You can say: Social Security has not and cannot by law contribute to the federal debt. And the program is too important to be used as a bargaining chip in negotiations about deficits that Social Security has not contributed to.

When they say: Isn’t the chained CPI necessary to help balance Social Security’s finances?

You can say: Social Security’s finances should be addressed on their own, not in the midst of the hysteria surrounding deficits that have nothing to do with Social Security. In fact, Social Security is in good shape: in 2013 its trustees projected that without any changes Social Security can continue to pay full benefits for another 20 years. To strengthen the long-term solvency in Social Security, there are far better policy options than cutting benefits. For example, lifting the Social Security tax cap would eliminate at least 70 percent of Social Security’s modest 75-year shortfall.

Hot Facts

  • $55 a month: That’s how much less a 65-year-old retiree today would end up getting 10 years from now than they would under the current cost-of-living adjustment.
  • Health expenses take up almost twice as much a share of a senior’s monthly expenses as it does of average workers, and health care costs rose at twice the rate of inflation in 2012.
  • Even with Social Security, almost one in seven seniors fall below the poverty line when all of their expenses are taken into account, according to the Census Bureau’s supplemental poverty measure.

Public Pulse

  • 62% of individuals called the Simpson-Bowles recommendation to adopt the chained CPI “totally unacceptable,” while 31% said it was “acceptable.” (Democracy Corps)
  • 60% of Americans thought that it was “unacceptable” to change Social Security to increase at a slower rate in order to strike a deal to avoid the January 1 “fiscal cliff.” ( Washington Post )
  • Only 8% of individuals support cutting “scheduled benefit increases for future retirees” when asked to choose one preferred Social Security reform (New York Times/CBS).
  • 56% of individuals consider preserving current Social Security and Medicare benefits a higher priority than reducing the budget deficit” (Pew).
  • 77% of Americans consider cutting Social Security “mostly or totally unacceptable” in order to reduce the deficit ( Wall Street Journal/NBC ).
  • Two-thirds of people support raising payroll taxes on the upper-income earners, compared with 38% who support raising Social Security’s “eligibility age.” (Pew Research) .
  • 66% of Americans, including 45% of Republicans and 64% of Independents, favor increasing income taxes for upper-income Americans, compared with 42% who favor making “significant changes” to Social Security and Medicare” (Gallup/USA Today).
  • 57% of respondents think that reducing retirement benefits for people who are currently under age 55 is a bad idea (Gallup).
  • 62% of individuals agreed that the government needs to keep its promises to older people by maintaining their benefits, even for those who are well-off (Pew Research).