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Home Publications Blogs Beat the Press Ruth Marcus Is Outraged by Overly Generous Social Security Checks

Ruth Marcus Is Outraged by Overly Generous Social Security Checks

Wednesday, 26 December 2012 08:15

Well, who can blame her? After all, we have tens of millions of seniors living high on Social Security checks averaging a bit over $1,200 a month at a time when folks like the CEOs in the Campaign to Fix the Debt are supposed to subsist on paychecks that typically come to $10 million to $20 million a year.

Anyhow, her main trick for cutting benefits is to adopt the chained consumer price index as the basis for the annual cost of living adjustment. This would have the effect of reducing benefits by 0.3 percentage points for each year of retirement. This means a beneficiary would see a 3 percent cut in benefits after 10 years, a 6 percent cut after 20 years and a 9 percent cut after 30 years. This is real money. Since Social Security is more than half the income for almost 70 percent of retirees and more than 90 percent of the income for 40 percent of retirees, the hit to the affected population would be considerably larger than the hit to the top 2 percent from ending the Bush era tax cuts.

But Marcus insists this cut must be done first and foremost in the name of accuracy, since the chained CPI is supposed to provide a better measure of the cost of living. She notes but quickly dismisses the evidence from the Bureau of Labor Statistics (BLS) consumer price index for the elderly (CPI-E), which shows that the rate of inflation seen by the elderly is somewhat higher than the overall rate of inflation.

"The problem with that is twofold. That measure is imperfect — the “E” stands for experimental. And, as the liberal Center on Budget and Policy Priorities notes, the burden of higher health costs falls unevenly among the elderly. Average costs are skewed upward by a minority who face very high out-of-pocket expenses, a problem better addressed by fixing Medicare to deal with catastrophic costs."

Actually, the "E" stands for elderly, but let's get to the substance. First, if we are interested in accuracy then the answer would seem to be to have the BLS construct a full elderly index that tracked the actual consumption patterns of the elderly. This would cost some additional money, but we will be indexing $10 trillion in Social Security benefits over the next decade so if we want to ensure accuracy, it would seem reasonable to spend $70-$80 million to put together a full elderly index that actually tracked the consumption patterns of the elderly, looking at the specific outlets where they shopped and the items that they purchased.

It is difficult to know exactly what this would show, but it is possible that even apart from the issue of health care it would show that the elderly experience a higher rate of inflation than the population as a whole. The current index already assumes substantial amounts of substitution in response to price changes at lower levels of aggregation (e.g. different types of cell phones). If the elderly are less flexible in their shopping patterns and a less mobile population then this substitution may have the effect of understating the increase in their cost of living.

The point about health care misunderstands the way the consumer price index is calculated. The index is an average index, which weights expenditures by dollars rather than households. While the health care case may suggest that a small minority is pulling costs up, it is also likely that a small minority is pulling costs down. The vast majority of the population does not buy a new car in a given year. Yet this item, which has barely risen in cost over the last decade according to the BLS, accounts for more than 3 percent of the weight of the index.  This means that new car purchases by a small and relatively wealthy segment of the population have had the effect of reducing the measured rate of inflation over this period.

This issue arises with many other items as well. The BLS makes a point of quickly including new items (e.g. the latest cell phone or tablet computer) in the index to capture their period of most rapid price decline. Since these items will generally be expensive when they are first introduced, they will disproportionately be consumed by wealthier households and likely under-consumed by the elderly.

This provides reason to believe that the CPI understates the cost of living of the typical household and especially the typical elderly household, but Marcus is only interested in finding reasons why there might be an overstatement. There is also the obvious point with health care which is that most elderly households in most years will not have large health care expenses, but that doesn't mean that at some point in their retirement that most elderly households will not see large health care expenses. That is the point of an index that picks up averages.

Marcus's argument that this is:

"a problem better addressed by fixing Medicare to deal with catastrophic costs," is intriguing. When exactly do we anticipate that Congress is going to fix Medicare to deal with catastrophic costs?

The story here is pretty simple. If we want a more accurate index for adjusting Social Security benefits then we would have BLS construct a full elderly index. If the point is to cut benefits then we would do what Marcus advocates and switch to a chained CPI. That will teach those high living seniors.



Comments (13)Add Comment
Hidden Chains to CPI
written by Robert Salzberg, December 26, 2012 8:13
For many low income Social Security beneficiaries who also receive SNAP benefits, the COLA raise triggers a SNAP benefit cut.

A friend of mine here in Florida who currently gets $720 from SS and $123 from SNAP per month has been notified that because of her $12 increase in January for SS, her SNAP benefit will be reduced by $5. The net effect is that her marginal COLA will be 0.8% instead of 1.7%.

With all the talk about chained CPI, have you read anything about how millions of dual SS and SNAP beneficiaries already don't really get the full effects of COLA?

Or more broadly, where's the discussion about how much of the COLA increase is eaten up by higher Medicare premiums so many SS beneficiaries never really get the full COLA ever?
The Younger the Beneficiary the Greater the Pain
written by James Simmons, December 26, 2012 9:16
Mr. Baker points out the dramatic effect a chained COL revision would have on younger workers but this needs to be stressed in the public debate. People in their 20s and 30s are already taking it on the chin in so many ways: unemployment, dead end jobs, student debt, lack of pensions etc. and now Social Security.
written by skeptonomist, December 26, 2012 9:55
Once again, why are SS benefits indexed to prices instead of the total economy? The starting point for negotiations anyway should be nominal GDP instead of CPI. The nominal GPD should be averaged or smoothed (in the way that potential GDP is derived) to avoid cyclical fluctuations. When the benefits are indexed to prices the standard of living of retirees is largely frozen at the last absolute level set by Congress, and they get little benefit from productivity increases (productivity increases do decrease some prices, for example those of electronic products, but not so much those of basic commodities such as food and housing).

Of course there is a problem in that the income of workers who are actually taxed to pay for SS has not been keeping up with GDP since around 1970 - they also have been getting relatively little benefit from productivity increases. The solution to this - at least for purposes of negotiation - should be to expand the SS tax base so that the entire economy, including high-income people, is tapped for benefits. This would be done by raising or eliminating the cap and including capital gains, interest and dividends in SS taxes.

That things like this are never mentioned in the media, or even by Democratic politicians, shows the massive plutocratic bias that is currently in the system.
written by skeptonomist, December 26, 2012 10:15
And why does Obama not even mention raising the cap, which he was definitely in favor of before his election. When exactly did he decide this was a bad idea?
It's Not Just About the Old Folks
written by andrew, December 26, 2012 10:50
Maybe I missed it somewhere, but what I am not hearing in this discussion is the effect this has on the younger people years away from collecting and the effect this will have on their initial benefit calculation when they become eligible. Isn't the more massive savings going to be in this demographic and just keep compounding year after year? If a 90 year old lady loses 9% after 30 years, my kids who would qualify in 50 years would really the ones being screwed right at the start and again each time chained CPI is re-applied thereafter.
written by PeonInChief, December 26, 2012 11:27
My very intuitive take on the CPI is that low and moderate-income households should double the CPI to determine their actual inflation rate--and I've found that to be pretty accurate, oh, since the Reagan Administration started fiddling it in the early '80s.

For elders it doesn't take into account the cost of finding housing that is accessible--stairs, bathrooms, and so on--which may be more limited (and costly) than housing for the general population.

Finally none of this takes into account the fact that the elders who don't count on Social Security for 90% of their income are either (a)rich or (b)have defined benefit pensions. The first is true for only a small percentage of the population, and the second is gone for the vast majority of future retirees.
written by Not So Fast, December 26, 2012 6:01
Just a thought on inflation adjustments. As a retired couple with Social Security and a modest pension, during the month of December we get notices of annual, CPI-indexed increases in our Social Security benefits an anybody's-guess-based increase in our pension. We also get notice of the premium increases in our Medicare Advantage Plan.

This year the sum of all three income increases barely covers the our Medicare Advantage plan premium increases.
The Cost Of Doing Nothing
written by Joe The Economist, December 26, 2012 11:21
"would see a 3 percent cut in benefits after 10 years, a 6 percent cut after 20 years and a 9 percent cut after 30 years"

Or we do nothing and we get a 25% cut after 20 years.
COLAs (which use CPI) start at 62
written by Mike B., December 27, 2012 5:41
Up to age 60, wages (which are used to determine benefits) are adjusted by the average wage index, which tends to go up faster than the CPI. CPI adjustments (COLAs) then start at age 62 (I think this is true regardless of when the person actually starts collecting benefits). Therefore, the change in CPI would not affect young people more than those who are now 60 (as far as old-age benefits, the main Social Security program).
It's All Baloney
written by Paul Lemmen, December 27, 2012 7:00
My SS increase is 1.7% and my Medicare premium increase is 5%? Give with one hand and take away with the other! I actually receive less in 2013 per month than in 2012.
and, why are adjustments not a loss of living stds ?
written by ezra abrams, December 27, 2012 12:29
if chained cpi says you move from Beef to Chicken if steak prices go up, why is that ok - isn't that a loss of living standard ?
What if Beef and Chicken go up, and you switch to chili - wouldn't that be a loss of living std
So why is chained CPI ok ?
I can understand for things like, say, fruit, where there are large seasonal variations,
or mabye I'm just not understanding the technical details of how BLS does this
Is it too much to ask to chain the cap to CPI?
written by Andy Olsen, December 28, 2012 7:06
At the very least, let's chain the cap on eligible income to the CPI-E. We prefer there be no cap or a much higher cap first. But this suggestion, at least, gets the cap in the conversation.
Not worry. The USD is going down the toilet.
written by Mike Ballard, January 02, 2013 6:52
Budget smudget. Investing in SS and the 401Ks has left us with half what we put in over the years because the USD has been inflated via QE and other printing for the finance capitalists to lend out to industrial capitalists and landlords....well maybe.

So, no worries. 'Our' economy will be able to export more and gain world market share as the old working class foggies attempt to buy commodities with their eviscerated dollars.

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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.