MILLER COLUMN-Why a new inflation gauge will hurt seniors

Wed Dec 19, 2012 3:45pm EST

By Mark Miller

CHICAGO Dec 19 (Reuters) - Let's talk "chained CPI" - a topic that sounds so wonky only a Washington policy nerd could love it. And that's probably what Washington politicians hope it sounds like to you.

The chained CPI is the new way to measure inflation that President Obama is proposing to set cost-of-living adjustments (COLAs) for Social Security and other government benefits. So far, it is his main concession to Republicans hungry for entitlement cuts as part of a fiscal cliff deal. And chained CPI proponents often describe it as a small, relatively painless change -- a technical fix aimed at making COLAs more accurate.

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Switching to a chained CPI is certain to have a very damaging impact on retirement security, for a simple reason: the inflation challenges facing seniors just aren't the same as those facing other Americans.

I'll explain why that is in a moment. But first, a bit of wonkery.

Social Security awards an annual COLA tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The index measures the cost of a market basket of goods and services; the third quarter index figures are averaged to calculate the Social Security COLA for the coming year.

Many economists argue that the CPI-W overstates inflation because it fails to account for the substitution that consumers make when the price of a particular product or service gets too expensive. The chained index attempts to reflect these substitutions. The theory is that a spike in gasoline prices will prompt consumers to spend less on fuel, perhaps more on food, and so on.

Plenty of seniors really don't have those kinds of options. Most of them live on modest fixed incomes: the average Social Security benefit this year is $14,800. And 46 percent of unmarried seniors rely on benefits for 90 percent of their total income. Much of their spending goes for necessities they cannot opt out of, such as food, housing, and utilities.

UNEXPECTED HEALTHCARE COSTS

And here is the really big wrinkle: Seniors also spend far more on healthcare than younger people. Healthcare inflation has been outpacing general inflation by a wide margin for some time now. During the past ten years, Medicare Part B premiums have risen by an average of 7.2 percent; the chained CPI is up by an average of just 2.25 percent. Healthcare is eating away a growing portion of seniors' COLAs.

The initial impact of a chained CPI looks small -- the Social Security Administration estimates it would reduce the COLAs by three-tenths of a percent annually. If it were in place now, the COLA just awarded for 2013 would have been 1.4 percent, rather than 1.7 percent. But the Social Security COLA is compounded, so the effect would snowball over time.

The National Women's Law Center has calculated that the average beneficiary filing for benefits at age 65 would lose $8,100 by age 80, and $19,245 by age 90. Putting this into more concrete terms, NWLC calculated the lost benefits into the number of weeks of groceries lost annually for a single elderly woman, starting at 65 with a monthly benefit of $1,100: six weeks at age 70; 13 weeks at age 80; and 20 weeks at age 90.

Senior advocacy groups, organized labor and progressive organizations have gone into full battle mode on this issue. They are feeling double-crossed by the Administration following a meeting with the President, Vice President and numerous other top officials just after the election, who promised that Social Security wouldn't be part of any fiscal cliff deal.

"We were told Social Security was off the table, and that whatever happens will be on a different timeline from the fiscal cliff negotiation," says Max Richtman, president of the National Committee to Preserve Social Security and Medicare.

The chained CPI move also comes after candidate Obama said that Social Security (and Medicare) are "bedrock commitments that America makes to its seniors, and I consider those commitments unshakeable" at AARP's national convention in September.

Vice President Joe Biden was just as emphatic during the campaign, issuing a "guarantee" during a Virginia campaign appearance last month that there would be no changes to Social Security in a second Obama term. (Well, this is still technically the first term, so I guess we're still okay on that promise.)

Richtman expects the Administration will attempt to soften the chained CPI blow by exempting recipients of veterans' benefits and Supplemental Security Income (SSI), a separate program designed to assist very low income and disabled people. The plan also will contain a bump in benefits for seniors over 85 that would lessen the impact of compounding.

"But not everyone lives to 85," Richtman says, "so if you don't make it to that age, this wouldn't do you much good."

The chained CPI could also face Republican opposition, because it would be applied to inflation adjustments for tax brackets in the personal income tax code -- effectively serving as a stealth tax hike by reducing tax bracket adjustments and subjecting more of individuals' earnings to higher tax rates over time. That could generate $72 billion in revenue over 10 years, according to the Congressional Budget Office.

Still, the lion's share of savings would come from benefit cuts -- $217 billion over 10 years. More than half of that -- $112 billion - will come from reduced Social Security COLAs. That sure sounds like a whole lot of substitution of goods and services.

Or, as a reader of an earlier column I wrote on this subject commented: "Sure, when the price of steak goes up, people switch to chicken. And when the price of chicken goes up, old folks will switch to cat food."

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