Social Security

Why 'Chained CPI' Rattles the Elderly (and Soon to Be)


Why 'Chained CPI' Rattles the Elderly (and Soon to Be)

(Corrects label in chart from “Chained index for urban workers” to “Chained index for urban consumers”.)

It’s presented as a technical, politically neutral fix, but make no mistake: The Obama administration’s proposal to change the basis for Social Security raises to “chained CPI” is all about saving money by slowing the growth rate of benefits. Whether you think that’s a good thing or a bad thing depends on whether you believe workers have been paying too much to support their elders.

The federal government ties Social Security benefits to measured inflation. Chained CPI gives a lower measure of inflation. So using it would result in slower benefit growth. It’s that simple.

In the chart accompanying this story, the two bars to notice first are the tallest one and the shortest one. The tall one is the percentage rise in the price of a market basket of goods and services typically used by people aged 62 and over. It’s for the period from December 1999 through February 2013, and it’s according to an experimental consumer-price index created by the Bureau of Labor Statistics.

The short bar on the right is chained CPI, which is the measure the Obama administration wants to use to calculate Social Security benefits. You can see that if this measure had been in use since 1999, Social Security recipients’ benefits would not have kept pace with their cost of living.

Right now, Social Security benefits are tied to CPI-W, the second bar from the right. It’s the CPI for urban wage earners and clerical workers. In other words, to calculate benefits for retirees, the government uses a measure of the inflation felt by working people. Go figure. It’s more generous than chained CPI but still below the government’s estimate of actual inflation for the elderly.

The only bar not mentioned yet is the one second from the left, CPI-U, which is widely reported by the media every month as “inflation.” It’s for all urban consumers, or about 88 percent of the population. It’s the one the government uses to adjust income tax brackets so people don’t get pushed into higher tax brackets by inflation.

Chained CPI is a flavor of CPI-U. The difference is that it takes into account shoppers’ ability to change what they buy in order to take advantage of bargains and avoid items that have risen in price. It’s called “chained” because the index is like a daisy chain in which the market basket of goods and services that are measured changes from month to month.

In March the Congressional Budget Office estimated that switching to chained CPI-U would reduce federal deficits by $340 billion in the decade from 2014 through 2023. Of that, $127 billion would come from savings on Social Security, about $89 billion from savings on other spending, and about $124 billion from additional tax revenue from people moving into higher tax brackets.

Peter Orszag, a Citigroup (C) executive who’s a past Obama budget director and past director of the Congressional Budget Office, wrote in a Bloomberg View column on April 7 that the CBO’s estimates of savings may be too high. Orszag said the CBO projected savings based on the long-term historical gap between chained CPI and the indexes the government uses now for benefits and taxes, whereas in recent years the gap has been smaller.

He estimates the savings over the next decade at less than $150 billion, or less than half the CBO estimate. “This does not amount to bold long-term deficit reduction. On the other hand, it wouldn’t be the end of Social Security as we know it either,” Orszag wrote.

Monique Morrissey, an economist at the Economic Policy Institute, which has opposed the move to chained CPI, said Orszag’s assurances about Social Security “should be taken with a grain of salt.”

Henry Aaron, a senior fellow in economic studies at the Brookings Institution, said in an e-mail that “the factors Peter cites could easily reverse”—in other words, the gap between chained CPI and today’s measures could start to widen again. In any case, Aaron says, chained CPI understates seniors’ cost of living because it doesn’t account for their heavy spending on health care. “If one wants to move in the direction of accuracy for the elderly, shifting to the chained CPI is a move in the wrong direction.”

Small percentage differences in indexes don’t matter much over a couple of years, but they accumulate, so the change would hit the oldest, longest-retired beneficiaries the hardest. Therefore, says Aaron, “if Social Security benefits are to be cut, this is not the way to do it. The way to do it is to selectively reduce benefits for those with comparatively high average earnings, and the reason for that approach is that most of the gains in life expectancy have been accruing to those with relatively high earnings.”

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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