What is the Chained CPI and Why Does It Matter to Your Mom?
Despite the fact that Social Security isn’t contributing a penny to the federal budget deficit, fiscal hawks have convinced President Barack Obama that we must slash its benefits to save the country. He’s joined the sky-is-falling crew in a crazed search for targeted cuts that will shrink Social Security outlays.
One idea he’s now putting on the table is a magic trick known as “chained CPI.”
Most people don’t understand the economic-speak well enough to grasp what this sleight of hand would do to Social Security. Here’s how it works:
Social Security benefits are periodically raised as inflation goes up. This is logical because, like everyone else, retirees need more money to buy goods and services when prices rise. The increase is called the annual cost-of-living adjustment (COLA). This variable has always been calculated using something called the Consumer Price Index (CPI).
The CPI is merely an estimate of how much more, percentage-wise, it will cost now to buy the exact same goods you bought last year. But some economists say the CPI is flawed because it doesn’t account for changes in consumers’ buying habits as prices increase. They question whether you’ll do what the CPI assumes and buy the same goods year-to-year even if prices rise.
The chained CPI supposedly accounts for expected changes in buying habits when prices increase. For example, you might start making chili with beans instead of meat if ground chuck starts costing too much, or buying clothes at Goodwill instead of Target. This alternative approach usually results in a number that’s at least 0.25 percent lower than the regular CPI.
If the government started using the chained CPI to calculate Social Security benefit increases, it would mean those cost-of-living adjustments would be lower. That would save the government money because Social Security checks wouldn’t increase as much as they otherwise would. In turn, deficit growth would slow.
There’s little disagreement that chained CPI would in fact do what its proponents say it would. The problem with using it to calculate Social Security COLAs is that it’s tied to the spending habits of workers, and people on Social Security are retired.
Retirees are apt to spend a larger portion of their income for housing and health care than workers do. They don’t commute, for example, so they spend less on gas. And housing and health care costs are rising much faster than other expenses. They’re also the two areas where people have the least flexibility in beans-for-meat type substitutions. It’s unrealistic to expect retirees or the disabled to move every time their rent or utility bills spike. And if they need a new hearing aid, what’s the alternative?
The bottom line for seniors is that chained CPI is just like a pay cut that compounds as the years go by.
The longer you live, the less you get.
While this method will hurt all retirees, it will hit women harder than men. The AARP is running ads against the change to a chained CPI, featuring a variety of women with the lines, “I am a grandmother. I am a widow. I am a woman. I am not a line item on a budget.” Here are some key reasons why this accounting trick will hurt women most:
- Thanks to the gender pay gap, women already have lower average annual benefits ($13,000) than men ($17,000).
- Women live longer and will see a greater share of the cuts with every passing year. More than two out of three Social Security beneficiaries ages 85 and up are female.
- Women are less likely to have other sources of retirement income, such as pensions and savings, so Social Security is more apt to account for nearly all of their income.
- Lower payments could push more women into poverty. In 2011, Social Security kept roughly 38 percent of older women out of poverty, compared to 32 percent of older men.
Whether the AARP and women’s advocates can prevail in this fight over who is going to pay for the deficit hawks’ obsession is anybody’s guess. But younger people ought to take up this cause too.
After all, if grandma’s benefits are cut, who has to take up the slack?
Look in the mirror.
A version of this blog originally ran on Other Words.