Viewpoint: ‘Chained’ CPI for Social Security Calculations Robs Retirees

The proposed 'chained' inflation index would cut Social Security increases even though a realistic index of elder inflation would push benefits higher. Can we just tell the truth?

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Financially speaking, we keep asking more of retirees. First, we ask folks who have saved for a lifetime to live on less while banks and indebted consumers use low interest rates to heal. Then we ask them to endure another whack at Social Security benefits while the government tries to rein in spending.

This isn’t especially new. We’re half a decade into historically low rates, which have made it all but impossible for many retirees to secure a livable income stream through traditional vehicles like bonds, bank CDs, and fixed annuities. But that’s kind of the point: A lot of seniors have sold assets to make ends meet. After five years, they are running out of things to sell.

Instead of relief, they get a bloody nose. Last month, the White House budget proposed tweaks to the cost-of-living formula used to determine annual Social Security benefits increases. Rest assured: This tweak would not make benefits more generous.

(MOREThe New Retirement: Forget Being Rich, All We Want Is Peace of Mind)

The President wants to use a “chained” consumer-price index, which accounts for how most people actually live. When beef prices go up, for example, many people buy cheaper chicken instead — so they don’t actually feel the full cost of the rising beef. Currently the CPI is running at 1.5%; chained CPI at 1.4%.

The problem is that while such a small difference may sound meaningless in the short term, when benefits increases are held back like this year after year, it has a reverse compounding effect. After 10 years, the average Social Security benefit would be about 3% less; after 30 years it would be 8.4% less. Instead of receiving, say, $20,000 a year, you’d be getting $18,320.

If that still doesn’t sound so bad, consider that even the current more generous CPI formula may systematically understate the inflation rate for seniors. The reason is that cheaper substitutes for many of their expenditures simply are not available, especially in the areas of healthcare and housing, which are big parts of a typical senior’s budget. So a realistic chained CPI for seniors arguably would increase benefits, not decrease them. The Department of Labor has been testing an alternate chained CPI for elders. Using its data, the AARP Public Policy Institute found that the accumulated benefit using the alternative version would average $4,052 higher after 10 years and $34,047 higher after 30 years.

(MORE: Sizing Up the Big Question: How Much Money Do You Need to Retire?)

The proposed chained CPI faces plenty opposition. So it may never come to pass, which would be welcome news to retirees who collectively derive 70% of their income from Social Security. Somehow, Social Security must be fixed and the budget must be trimmed. But if we’re going to further strip retirees’ reliable income sources let’s at least be honest about how we do it.

8 comments
MrBenGhazi
MrBenGhazi

On the actual substance of the article: social security is irreparably broken. It was never intended to support a full third of the US population for a third of their lifetime. We need to create a new system that only support those who truly need it for the true twilight years of their lives. Otherwise, this system will bankrupt the rest of the country.

MrBenGhazi
MrBenGhazi

"Viewpoint: Chained API...."

THIS. Thank you so much for making it obvious to the world that this is an opinion piece. Online media in particular likes to omit this detail.

JimB210
JimB210

Perhaps the first reform to Social Security to insure its future soundness should be to make the payroll tax less regressive, and remove the income cap. Given that few or no people, however wealthy refuse to accept the Social Security benefits (typically wealthy individuals viewpoint is "Its my money, I earned it, I paid in so I'm going to take it" this would make the payroll tax a truly fair "flat tax". Some may say that this would penalize wealthy, who would pay a far greater amount in relative to their eventual benefit, but percentage wise this greater amount would be the same as the 15%+ on a low-wage worker, who now is impacted for the 15%+ on every single dollar of earnings if they make less than the cap amount, while the high-income earners may pay only a fraction of 1% of their overall income in payroll tax... hardly fair on the face of it. Once we have removed the inequity of the payroll tax cap, a re-assement of the longer-term financial prospects for Social Security would be warranted, and then only if really necessary should be consider reductions in benefits or COLA formulas. This proposal should encounter no conservative opposition, for it is only seeking the fairness and level playing field of a flat tax, which is a touchstone of the Tea Party movement.

dollared
dollared

Bravo!  1) Social Security does not contribute to the budget deficit, and it should not be touched.  2) the only reason we have less revenue than projected entering the Trust Fund is because companies have gutted middle class wages.  The percentage of the national income going to workers, rather than Wall Street, has declined nearly 20 over 30 years.  If it had kept up, we would have not problems at all. 

So - management is making all workers poorer.  The solution is not to cut retirement income via cutting Social Security..  The solution is to tax capital gains and inheritances to support Social Security!  At the very least, raise the income cap so Social Security has more income!

bryanfred1
bryanfred1

What's this "we" business?  The Fed has been keeping rates at historically lows in an effort to stimulate the economy (as if the cost of debt is what's been holding us back) and prop up housing prices.  People have been saying for several years now that this is squeezing people on fixed incomes, making them even more reliant on Social Security.  Chained CPI is one of several proposals to keep that increasingly important program from bankruptcy.  Want to really improve retirees' incomes?  Tell the Fed to stop penalizing savers with its negative real interest rates.

bryanfred1
bryanfred1

There is an income cap because benefits are capped.  SS is supposed to work like a national savings program - pay a certain amount in, get a related amount out.  The amount you get is tied to how much you paid in, and how much you paid in is tied to how much you earned.  Removing the cap would turn SS into retirement welfare (which it was never intended to be) unless the benefit caps were removed as well, which I don't see happening.

Having said all that, I expect removal of the caps will ultimately be part of the solution that keeps SS solvent.

dollared
dollared

erl has declined 20% over 30 years.....

tom.litton
tom.litton

@bryanfred1 The fed is doing what congress told it to do, produce full employment and keep prices stable.  It would take an act of congress to tell it to ignore one or both of those things.  

Cutting short term interest rates is the classic and best way of reducing unemployment.