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The impact of changing Social Security's cost-of-living adjustment by tying it to the “chained” consumer price index could be much larger than economists anticipate, speakers said during a March 11 event sponsored by AARP's Public Policy Institute.
“People tend to get poorer as they get older. … This is a very, very important point in the context of the chained CPI,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
The chained CPI (C-CPI-U) has been widely discussed by the Obama administration and congressional lawmakers as possibly being part of a deal on cutting the deficit. The chained CPI seeks to more accurately reflect consumers' responses to price changes than the CPI-W, the consumer price index that is currently used to calculate Social Security COLAs. The C-CPI-U attempts to capture consumer's tendency to switch from one category of product to another (“upper-level substitution,” such as from apples to bananas) when the price of the original product rises.
While switching to the chained CPI would reduce cost-of-living adjustments by about 0.3 percentage points a year through 2085 and reduce the program's 75-year deficit by about one-quarter, Baker said that, if someone receives Social Security payments for an average of 20 years, using the chained CPI would result in an average cut in benefits of about 3 percent during that period of time.
Baker said that, while some people have said that reduction of three-tenths of a percent does not appear to be a huge change, “it's three-tenths of a percent a year that accumulates over time. Ten years, we're looking at a cut of 3 percent of your benefits; 20 years, 6 percent; 30 years, 9 percent.”
“So we're giving the biggest hit to the people in their 70s, 80s, 90s,” he said.
While proponents see the chained CPI as more accurate, it is unclear if it is the best option for those receiving benefits, Baker said.
“If we're saying we want an index that follows the cost of living of seniors, we could do that by constructing a full elderly index. It could be a chained elderly index, but we don't have the information we need to say that now. We know that a chained CPI is a cut. That's indisputable. It will give lower benefits than what's in the current law. Whether it's more accurate or not, we don't have the information to answer that question,” he said.
Rebecca Vallas, an attorney with Community Legal Services of Philadelphia, said that switching to the chained CPI would have a tremendous impact on those receiving Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI).
“A lot of people call a switch to the chained CPI a technical change. I would argue that, for people for whom this is their sole--or majority--source of income, it is significantly more than a technical change. It is a huge cut in your household income,” she said.
Vallas said she understands arguments for the chained CPI, especially in the eyes of economists, but that its real-world application is quite different.
“The best example of why the chained CPI makes sense to a lot of economists I've heard is, well, if the price of a Mercedes goes up, people will just buy an Audi. That doesn't work for my clients,” Vallas said. In practice, Vallas said many will have to cut out things they truly need, such as medicine and food, not just switch from one product to another.
“The chained CPI works for economists, but it doesn't work for the real people,” she said.
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