Advertiser Disclosure

How Does The “Chained” CPI Affect Social Security Benefits?

Dec. 6, 2012
Personal Finance
cheatgame.info adheres to strict standards of editorial integrity to help you make decisions with confidence. Some of the products we feature are from partners. Here’s how we make money.
We adhere to strict standards of editorial integrity. Some of the products we feature are from our partners. Here’s how we make money.

If it weren’t for inflation, figuring out Social Security payments would be easy. You and your employers fund the system by chipping in a little each time you get a paycheck. Once you retire, the minimum size of your check is determined by how long you worked and how much you earned. At some point you lock in a specific figure by choosing when your payments start.

But the cost of living is always on the rise, so the size of the payments must be adjusted to keep pace. The government keeps track of changes in the cost of living with the Consumer Price Index, or CPI.

How is the Consumer Price Index calculated?

The government uses the costs of a representative “market basket” of goods and services – among them food, clothing, medical care, and transportation – to determine the CPI. Even though no formula can track the exact movements of shoppers in the produce aisle deciding whether the red delicious or the golden delicious apples look better this week, this methodology works well enough when people buy things within “categories” like apples or beef or potatoes. If fluctuations in the price of the golden delicious reflect the cost of apples in general, the Bureau of Labor Statistics still has a handle on what it’s costing people to live.

But what if a shopper decides she can’t afford apples at all? If she spends less that day, her cost of living has gone down, even though the price of apples might be sky-high. And next time she may think she can’t handle the price of a pork roast and decide to buy hamburger instead.

That’s where the “chained” CPI comes in. Its formulas are designed to take into account the substitutions that people make in their buying decisions, and compute the cost of living more accurately. So even if people try to economize by buying that hamburger – or taking the bus to the market instead of driving – Uncle Sam won’t be fooled into thinking they’re still living high on the hog.

Why do some politicians like the “chained” CPI?

Many politicians say they like it because it’s more accurate – but, more importantly, it generally estimates a more modest rise in Americans’ cost of living, which means skimpier checks for retirees.

How much more slowly would the cost of living rise if you figured it using the “chained” CPI? By about .3 % a year, according to the Bureau of Labor Statistics. Doesn’t sound like much, but since it’s cumulative year after year, the older you get, the deeper the cuts. Here’s how The National Committee to Preserve Social Security and Medicare figures it:

The typical 65-year-old, who filed for benefits at 62, would lose about $130 per year in benefits. By the time that senior reaches 95, the annual benefit cut will be almost $1,400, which is a 9.2% cut. 

Since women live longer, incidentally, they’re more likely to be around to get the full whammy of that 9.2% cut. That’s only one of the ways that a “chained” CPI would disproportionately affect women. Elderly women are also much more likely to rely on Social Security, and be living in poverty, than their male counterparts.

Is it fair to apply the Chained CPI to retirees’ living costs?

It’s important to note that, however we compute the cost of living, we’re measuring it for the general population and then using the numbers we come up with to impact a very unique subset of that population. As Richard Eskow points out in the Huffington Post:

Retired and disabled people pay twice as much for healthcare as the average person. Healthcare costs have been rising three times as quickly as overall inflation, so their living costs are already understated. Transportation costs are a much bigger piece of their budget, too, which changes the numbers.

In other words, the system already discriminates against Social Security recipients; any “technical adjustments” that reduce their benefits further are at best misconceived.

And don’t forget, you can’t break out of this trap by economizing. As people cut corners, their cost of living goes down, which means that the next time it’s calculated, the statisticians at the BLS will conclude that they can get by with less. Each year the poorest among us will have to give up something else, which keeps their cost of living low, and ensures that their next increase will be even lower.

 

CPI Image via Shutterstock