On Using the Chained CPI for Social Security Cost of Living Adjustments

There has been considerable discussion of basing the Social Security cost of living adjustment (COLA) on the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) as a “painless” way of generating large budget savings.  This view reflects serious confusion about what the switch to the C-CPI-U involves.  (The switch would also lead to higher tax revenue by slowing the rise in the bracket cutoffs.)

While it is often claimed that this switch will make the COLA more accurate, this is not clear.  What is certain is that the switch would lower benefits.  The research on the C-CPI-U shows that the switch would reduce benefits by roughly 0.3 percentage points a year compared with the baseline.  This means that after someone has been retired for 10 years, their benefits would be 3 percent lower.  After 20 years of retirement, their benefits would be 6 percent lower and people living into their 90s and collecting benefits for more than 30 years would see a drop in benefits of more than 9 percent.  This might be especially difficult since the oldest of the elderly also tend to be the poorest.

This is a benefit cut that would hit current retirees, most of whom are not especially affluent.  More than 90 percent of beneficiaries have non-Social Security incomes of less than $40,000.  In addition, the Joint Committee on Taxation recently estimated that by 2021, 69 percent of the higher tax revenue gained from switching to the C-CPI-U would come from taxpayers making less than $100,000.  By contrast, President Obama has set a $250,000 floor on the households whom he would subject to tax increases.

Near retirees are not likely to fair better.  Among older baby boomers (ages 55-64) median wealth is just $170,000, including home equity.  Given that this crisis stems from the failings of the financial sector, it seems peculiar that Congress and President Obama may arrive at a budget deal that imposes a considerable burden on retired workers, but asks nothing from Wall Street.

It is also worth noting that there is no basis for the claim that the C-CPI-U would provide a more accurate COLA for Social Security beneficiaries.  The Bureau of Labor Statistics’ (BLS) Experimental Price Index for the Elderly has consistently shown a somewhat higher rate of inflation for the elderly population.

If the concern is accuracy, then the route should be to have the BLS construct a full elderly index that could take account of actual purchase substitution patterns among elderly consumers.  Simply switching to the C-CPI-U without undertaking this research is consistent with a desire to cut Social Security, not to make the COLA more accurate.

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C.  He is the author of several books, including False Profits: Recovering from the Bubble Economy.  This statement was issued by CEPR today.

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