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Home Publications Blogs Beat the Press NYT Nails It on Social Security and the Chained CPI

NYT Nails It on Social Security and the Chained CPI

Sunday, 13 January 2013 08:44

"Chained CPI" is the new magic phrase going around Washington these days. This is how the government can cut Social Security and pretend it is not really cutting Social Security.

If anyone has not yet heard the story, the plan is to change the indexation formula for the annual cost of living adjustment by using the chained CPI to measure inflation. It's not worth going into the details (the people proposing it don't care, why should you?), but the point is that the chained CPI would reduce the annual adjustment by 0.3 percentage points.

This may sound trivial but it adds up over time. After ten years a retiree's benefits would be 3 percent lower, after twenty years 6 percent lower and someone surviving to collect benefits for thirty years would see a 9 percent cut. If we assume the average retiree collects benefits for 20 years, this amounts to a 3 percent cut in total benefits. If that sounds small, ask the "job creators" about the impact of a 3 percentage point increase in their tax rate.

Anyhow, a NYT editorial on the topic makes all the right points, including an obvious one, if the concern is making the indexation formula more accurate we can have the Bureau of Labor Statistics (BLS) construct a full cost of living index for the elderly. An experimental index that BLS already produces shows that the current cost of living adjustment is actually less than the rate of inflation seen by the elderly. There is a long way from this experimental index to a full elderly CPI, but given that we will index $10 trillion in Social Security benefits over the next decade, it might be worth going this route. 

Comments (16)Add Comment
written by Chris Engel, January 13, 2013 9:24
What a rare puff piece by Dr. Baker!

I was half-expecting to open the NYT-link and see your name in the by line.

written by watermelonpunch, January 13, 2013 9:28
we can have the Bureau of Labor Statistics (BLS) construct a full cost of living index for the elderly

Who would make the decision on this?
(ie: who am I to write to in order to encourage this! :)
written by skeptonomist, January 13, 2013 10:13
And again, there is no moral or economic reason why SS benefits should be linked to any measure of the price level. This shuts retirees out from productivity increases. The starting point should be linkage to (averaged or smoothed) nominal GDP. To make this work, the tax base should be expanded to include all income, not just wages and salaries - there is also no moral or economic reason for this limitation.
The Culprits
written by Jeffrey Stewart, January 13, 2013 1:27
People should be keenly aware that the cbpp.org's president, Robert Greenstein, Senior Fellow and former economic adviser to VP Biden, Jared Bernstein and cbpp.org board member, Henry J. Aaron have all most recently advocated cuts to Social Security using the chained CPI. cbpp.org has a supposed left leaning bent. However this is one organization that is behind the scenes pushing President Obama to cut Social Security benefits.

It's really worthwhile to accurately represent Dr. Bernstein's sole reason for cutting Social Security benefits. He argues that cuts are coming anyway so President Obama might as well get something for them in budget negotiations! Note here the complete lack of concern for society's most vulnerable members. He doesn't have a whit of care for those cuts hurt; it's all deal making and horse trading.

No left or progressive organization worth the name advocates cutting programs people paid for their entire working lives in the name of deficit and debt reduction, especially when Social Security doesn't contribute one cent to the debt.
Social Security is Insurance
written by bakho, January 13, 2013 1:59
I don't think it will end well for Obama or any Democrats who vote to cut SS benefits. It did not work out well after GW Bush and the GOP tried it.
The chained CPI might be worse than it looks
written by Randy Moor, January 13, 2013 2:36
It seems to me the chained CPI would cause a bigger drop than the 0.3 percentage points per year that the test version has shown because if the chained CPI becomes the official cost of living adjuster there will be a feedback loop that does not exist in the test version. As people attempt to economize by switching to less expensive products or buying fewer things they will trigger reductions in their cost of living adjustments, leaving them with a need to economize more and causing a vicious cycle.
One small point
written by AndrewSolarski, January 13, 2013 2:59
I know it is implied in the math but you've never stated this outright. It's not only those on SS for 30 years that will see a 9% reduction in their benefits. Those 30 years away from starting to draw on SS will begin the program with a benefit 9% lower than they would otherwise. The number of people affected then increases many fold, after all how many beneficiaries will actually live to 95?
"CHAINED" CPI describes it exactly
written by jumpinjezebel, January 13, 2013 3:08
An illustration of a line of elderly people chained together (a la a CHAIN-Gang style) and some them already over the cliff into poverty and the rest of them standing on the edge of the cliff about to be pulled over.
Take away their levers
written by Shorty, January 13, 2013 9:40
If SS benefits for each cohort were direct tied to their contributions (using a legislated interest rate such as 3% and actuarial assumptions about mortality), then the benefits would become untouchable because it would be evident that the taxpayer paid for his own benefits.
disparity between benefits and income is the issue
written by pete, January 14, 2013 11:46
If SS were SS "insurance" then it would be an add on to other retirement income phased out as retirement income rises. Then it could be raised to above poverty levels for those entirely dependent on it. Getting the adjustments to the cost of living calculated correctly is important as well. Those on SS with substantial other income likely have a completely different basket of goods than those entirely dependent on it. I guess you could use the median retiree total income to calculate the cost of living? But the rich likely have more flexibility. This would lower the cost of living increases, using the chain rule. This is really the problemn with SS...one size does not fit all.

And of course SS should be delinked from lifetime contributions. Taxes on labor are distortionary, even the flat 12.5% SS tax. Somebody earning $10,000 for a company pays $1,250 in taxes, with $625 of that kicked in by the company. That is way too high a burden. Cutting income taxes and pay roll taxes and substituting pigovian taxes is much better. A nice fat tax on carbon as the Irish are doing would be much more efficient.
Effects of chained CPI start at age 62
written by Mike B., January 14, 2013 12:46
CPI is not used to adjust benefits before age 62. Instead, wages, which determine benefits, are adjusted (until age 60) according to the change in average wages, which tend to increase faster than CPI. I think the effect of a change in the CPI measure starts at age 62, not when benefits are actually started (unless that is before age 62, as in disability - those recipients would be the most harmed by the change).
other chained cpi uses
written by melontete, January 14, 2013 5:35
did the republicans push to use the chained cpi when indexing the estate tax?
chained CPI - tax bracket effect and other awful results
written by Christine W., January 14, 2013 7:21
Did you know that using the Chained CPI method will throw people into a higher tax bracket? Most affected $30,000-$40,000, second most $20,000 - $30,000. The Republicans know this, but sure aren't saying anything about it. Plus, this measure of figuring CPI will affect those on veterans and other federal pensions/retirements, because all are linked for CPI purposes.
It seems that the pressure to rush to a budget deal hides all consequences, either intended or unintended and no one has really adequately researched the complete ramifications as it plays out in reality. So, in service of bizarre and way off base economic theory, the politicians rush to something that could turn out very badly. I first heard about Chained CPI a year ago, but it only has been in the last few weeks that there has been any publicity about it. At at least two Congressional offices in D.C. I called, the folks answering the phones didn't know about it . If they aren't informed, then how many people who will be affected by this will. I will be affected,because I am a federal retiree, I paid into my retirement fund (which is separate from social security and is self-sustaining - in fact Congress periodically "borrows" from it). My federal retirement benefits are subject to income taxes, whereas most social security benefits are not. I am complaining about this, but mention it only as insight into all the effects of this....I do not understand why everyone thinks this is inevitable? More people need to call their Congress reps office and the White House (I already have done both)
Chained CPI edit to my comment
written by Christine W., January 14, 2013 7:28
I meant to say in my comment that I am NOT complaining about this, taxes are necessary.
written by Mike Ballard, January 15, 2013 12:18
"Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish." Marx to Kugelmann 1868. Labor is entitled to all it produces. That labor gets some small amount of the wealth it, and it alone creates (outside of the wealth 'found' in natural resources) is pity enough. The chained CPI is just another way of mystifying the generalised robbery involved in the workings of the wage system.
Too much steak on $1200 a month.
written by v98max, January 15, 2013 12:23
Chained CPI involves altering the basket of goods whose prices are tracked to reflect peoples shifting preferences over time. For instance, people substitute chicken for steak if steak gets too expensive, to keep their food bills constant. Well it occurs to me that a Social Security retiree isn't eating too much steak on $1200 a month. But chained CPI would force people to do more substitution by giving out smaller COLAs, and the whole thing reflects the preferences of people who think retirees are eating too well on $1200 a month.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.