POSTED BY ORHAN
America’s topple from the fiscal cliff will be triggered by the Budget Control Act of 2011, which was sparked by the debt ceiling debate of the same year. Now, as part of the fiscal cliff negotiations, President Obama has agreed to cut Social Security by switching to something called Chained CPI to figure the amount in your Social Security check.
I checked the Social Security website trying understand the impact of the switch, and pulled a few facts. Turns out the Bureau of Labor Statistics employs several different CPI measurements:
- Consumer Price Index for All Urban Consumers (CPI-U)
- Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)
- Chained Consumer Price Index for All Urban Consumers (C-CPI-U)
- An experimental data series, the CPI-E, to measure the “inflation experience” of those aged 62 or older
This chart from the site shows how the different CPIs measure inflation over time. Chained CPI calculations result in a lower inflation rate number:
No calculation method is (or can be) completely accurate, but seniors are more likely to experience inflation patterns closer to the CPI-E, although the CPI-E may be less accurate because the population test bed is smaller. Inflation measured by the CPI-E is higher, due to seniors’ higher medical costs, which rise faster than other costs.
Inflation measured by the C-CPI-U is lower, due to the “substitution factor” caused by rising prices on some goods. For example, if the cost of chicken goes up, one would tend to substitute some lower priced meat like bologna.* (Some politicians have suggested that because of this, your Social Security check has really been too fat all these years.)
Cost of living adjustments (COLAs – the increase one sees in one’s SS check every few years) are currently based on the CPI-U and CPI-W.
Obama proposes switching to the C-CPI-U to calculate COLAs even though seniors need more than the CPI-U and CPI-W to keep up with inflation, not less. Why the switch? No other reason than C-CPI-U will pay less over time than the current method. Assertions that C-CPI-U is more “accurate”, or it’s just a “tweak” to the calculation, or “if enacted, nobody would notice the difference”, are ludicrous. Over a long retirement, Chained CPI would result in a month’s loss of benefits yearly, or about 8.3%. That’s a hefty cut.
*If the cost of bologna rises too much, I understand Kibbles ‘n Bits Bistro Meals have been found to be quite edible.