"Chaining" inflation gauge would hurt Social Security recipients

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News Analysis

(MoneyWatch) Among the policies lawmakers are considering as part of the "fiscal cliff" talks in Washington is to change how the government measures inflation in Social Security payments. President Barack Obama has proposed adopting what is known as a "chained" Consumer Price Index, or CPI, as part of his plan to reduce the nation's deficit and raise revenue through an income tax hike wealthy Americans.

Advocates contend that this approach is a relatively painless way to shrink the government's budget gap and to shore up the federal retirement program, which they contend is financially troubled. But liberal lawmakers and pundits have panned the idea, arguing that it would result in lower benefits for Social Security recipients, millions of whom depend on the program as their main source of income.

What does chained-CPI mean?

The government currently calculates Social Security's cost-of-living adjustment, or COLA, each year based on how inflation affects urban wage earners and clerical workers. Known as CPI-W, this index measures changes in the prices of a fixed basket of goods that are deemed to be representative of regular purchases by wage earners.

In contrast, the chained-CPI assumes that as prices increase, consumers make substitutions in what they purchase. The common illustration is that if the price of beef increases but the price of chicken is stable, consumers will purchase less beef and more chicken.

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The chained-CPI is being proposed to adjust not only Social Security benefits, but also benefits from a host of other federal programs, such as federal pensions, veterans benefits and Supplemental Security Income (SSI). It would also be used to index future increases in tax brackets. This last item is particularly important because if tax brackets rise at a slower rate, then federal tax revenues will increase, also helping to reduce the deficit.

The Bureau of Labor Statistics estimates that for the past decade, the chained-CPI increased at an annual rate that was about 0.33 percent lower than the CPI-W. The Congressional Budget Office estimates that in future years, increases in the chained-CPI might be 0.25 percent lower each year than increases in the CPI-W.

Based on the CPI-W, the Social Security COLA was zero for both 2010 and 2011, 3.7 percent for 2012, and will be 1.7 percent for 2013. The average dollar increase in Social Security next year will be about $21 per month; it would have been about $17 per month if Social Security had based the increase on the chained-CPI.

Earlier this year, the CBO estimated that if the federal government had moved to the chained-CPI on Jan. 1 2012, it would save more than $220 billion over 10 years. The net savings would be considerably lower if Congress adopts measures to soften the blow to the most vulnerable Social Security recipients.

Who would be hurt?

In general, people who would be negatively affected by the use of the chained-CPI would be retirees and other beneficiaries who receive most of their income from Social Security and who aren't in a position to switch to other goods and services when prices rise.

For example, Medicare premiums and out-of-pocket medical expenses take up a large share of many retirees' budgets. Many retirees have no alternative to Medicare, so for these people the only "substitution" for medical care paid under the program is to go without it. 

With Social Security, one reason that's a concern is that millions of seniors depend on the program just to get by. According to the Social Security Administration, 86 percent of U.S. households with one member aged 65 or older, or nearly 39 million Americans as of the end of 2011, receive Social Security benefits. For these households, Social Security income represents the largest component of their total income, at 37 percent, followed by wages at 30 percent.

You might think, what's the big deal if 37 percent of a retiree's total income grows at a slightly lower rate? But averages can be deceiving.

According to government statistics, median income for people over age 65 is roughly $20,000 a year. Social Security provides at least half of total household income for 65 percent of all aged beneficiaries. And for non-married beneficiaries, that figure rises to 74 percent, or nearly three-quarters of their income.

For more than a third of of all older beneficiaries, Social Security provides 90 percent or more of total income, while for non-married beneficiaries that figure rises to 46 percent. These are the people who would suffer most under a chained-CPI, a group that encompasses more than one-third of all Social Security beneficiaries and almost half of all single participants in the program, many of whom are elderly widows.

Nine percent of the elderly population have incomes below the poverty line, while another 5.7 percent are defined as "near poor," with incomes between 100 and 125 percent of the poverty lines. So a total of nearly 15 percent of Americans considered poor or near-poor. This percentage is 7.3 percent for all married people, 21.9 percent for single men, and 24.8 percent for single women. These figures are even higher African-Americans and Hispanics.

Let's take a quick look at one aspect of the substitution issue. The average monthly benefit for new retirees in 2011 was $1,241. In 2011, the Medicare Part B premium for most new retirees was $115.40 per month, representing almost 10 percent of their monthly check. That's for single retirees; the percentage increases to over 13 percent for married retirees. And that's not even counting out-of-pocket medical expenses.

There's no way to substitute for Medicare premiums, and it's difficult to substitute for out-of-pocket medical expenses. In other words, paying for these premiums and expenses represents a real financial hardship for the one-third of aged beneficiaries around the country for whom Social Security represents almost their entire income.

The bottom line: The elderly poor, singles, widows, widowers, and non-whites will be most negatively affected by shifting to a chained-CPI approach to calculating Social Security cost-of-living adjustments. If you count just those retirees whose Social Security benefits represent 90 percent of their total income, that's over 13 million Americans.

Asked what the Obama administration would do to these retirees, White House Press Secretary Jay Carney said last week that the "oldest of Social Security recipients would be potentially protected from the impact of a change like this." He declined to offer details. 

Possible fixes

The Simpson-Bowles recommendations on Social Security attempted to soften the impact on the elderly poor by proposing a minimum Social Security income. If your Social Security income as increased by the chained-CPI fell below this minimum income, then you'd be paid this minimum income instead.

Another possible fix would be to continue using the current COLA for the Supplemental Security Income program, which provides additional support to impoverished elderly, disabled and blind people.

It's not clear if and how a minimum benefit under Social Security or exemptions for the SSI program might work their way into the fiscal cliff negotiations. Any of these fixes impose a "cost" by reducing the savings in the federal budget.

[RobertVBrand]

"Chaining" means substituting -- like dog food for fatty hamburger. Doctors say eat healthier; congress says eat cheaper.

[mmmail2CBS]

Just remove the cap on social security contributions and there will be enough money to keep the safety net for our fellow citizens well knit. These are not "entitlements," but systems into which workers have contributed their hard earned money. The US would save more by eliminating the real entitlements, the subsidies and tax breaks we give to oil companies, agribusiness (not farmers, but large corporate entities like Monsanto), defense contractors (taxes pay for their expenses, then they also deduct those same expenses from their profit margins so pay less tax) and pharmaceutical companies.

The wealthy finish paying their total allotment very early in working life. Continuing to pay the relatively small amount to protect from destitution those who've worked their entire lives is the right thing to do. The wealthy and politicians don't need social security or medicare, they have created separate secure systems for themselves. Doing what is morally right is out of fashion and never seems to be part of political discussion, but helping each other and being respectful of work remains true and real.

[RobertVBrand]

You don't know what an entitlement is, do you, MMM? Or is it that you don't feel entitled to Social Security payments? "Entitlements" are not just government giveaway programs, despite the misinformation you are spouting.
Not that I disagree with your idea of doing away with the cap -- a millionaire CEO, who doesn't need Social Security for his retirement package, pays only .7 of 1% of his income for SS tax; the poor working snook who makes only $25,000 a year pays 6.2%. Multi-millionaires who make their income from investments pay nothing into SS. But not one politician suggests eliminating the SS tax cap for fear of losing contributions.

[Kenezen]

Let's share the pain! Federal Government Pensions and State Pensions should also be "Chained"! After all these pensions have been bailed out before! Why should Private paid-in money from older citizens be differentiated from Public Pensions?

Let's share the pain with our legislators as well!!

[kitchenfamily1004]

Americans are so stupid... They don't know how grateful they are until they lose it all.

[hypnotoad72]

And many of them side with the politicians that want to take it all away, while continuing every corporate handout unabated. And the corporate handouts in return for their offshoring jobs only compounds the issue...

[Counselor12]

There are much more progressive, less harmful ways of reducing expenditure on Social Security and making it actuarially sound than the chained CPI. Just take the cap off earnings contributions. Or see online A Summary of Saving Social Security: A Balanced Approach. Peter A. Diamond and Peter R. Orszag at http://economics.mit.edu/files/684 Democrats will be at fault equally with Republicans for damaging the general welfare if they do not insist on one of these substitutes for chained CPI.

[[e-mail]]

I am tired of these greedy folks like COUNSELOR12 who want more of my hard earned money for these old folks who voted for the generations of politicians who spent the money in the so called trust fund. Nope -- these old folks need to reap what they sowed. No more money from me!

[davidd5063]

The ederly poor are gonna take a hit and you can thank your wealthier retiree buddies for refusing to compromise, or you can try to blame me for not being willing to let you steal from my kids.

[askagain]

None of this would be be necessary if politicians of the past had kept their hands off of the Social Security money. Now the recipients and those contributing to Social Security become the fall guys, expected to fix the problem. What will keep politicians away from the Social Security money in the future?

[RobertVBrand]

Doing something about Social Security would still be necessary if Congress hadn't spent the trust fund on other things -- it just wouldn't be part of the deficit. SS still pays for itself for many years now, but still Congress and the president urgently want to "fix" it. The fix lies in removing the "cap" so the wealthy pay into the system even if their retirement plans are paid by their company, but no politician suggests that for fear of losing contributions.

[omnibus66]

The current COLA calculations do not include the rising cost of insurance and prescription drugs. Too many of the elderly have to choose between food and medicine. The top 2% more typically choose between first class and private jet. Is this a great country, or what?

[mjvwsr]

It is a great country which is why I can choose between first class and a private jet.

[hypnotoad72]

If you got to the 2% by trampling on the 98%, you're unethical or immoral.

Yeah, some people who make it did so by ethical means. Not all, and those who lump all the rich into one category (ethical) only make the rest of us laugh.