By Steve Vernon, CBS MoneyWatch
(MoneyWatch) Among the policies lawmakers are considering as part of the “fiscal cliff” talks in Washington is to change how the government measures inflation in Social Security payments. President Barack Obama has proposed adopting what is known as a “chained” Consumer Price Index, or CPI, as part of his plan to reduce the nation’s deficit and raise revenue through an income tax hike on wealthy Americans.
Advocates contend that this approach is a relatively painless way to shrink the government’s budget gap and to shore up the federal retirement program, which they contend is financially troubled. But liberal lawmakers and pundits have panned the idea, arguing that it would result in lower benefits for Social Security recipients, millions of whom depend on the program as their main source of income.
What does chained-CPI mean?
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The government currently calculates Social Security’s cost-of-living adjustment, or COLA, each year based on how inflation affects urban wage earners and clerical workers. Known as CPI-W, this index measures changes in the prices of a fixed basket of goods that are deemed to be representative of regular purchases by wage earners.
In contrast, the chained-CPI assumes that as prices increase, consumers make substitutions in what they purchase. The common illustration is that if the price of beef increases but the price of chicken is stable, consumers will purchase less beef and more chicken.
The chained-CPI is being proposed to adjust not only Social Security benefits, but also benefits from a host of other federal programs, such as federal pensions, veterans benefits and Supplemental Security Income (SSI). It would also be used to index future increases in tax brackets. This last item is particularly important because if tax brackets rise at a slower rate, then federal tax revenues will increase, also helping to reduce the deficit.
The Bureau of Labor Statistics estimates that for the past decade, the chained-CPI increased at an annual rate that was about 0.33 percent lower than the CPI-W. The Congressional Budget Office estimates that in future years, increases in the chained-CPI might be 0.25 percent lower each year than increases in the CPI-W.
Based on the CPI-W, the Social Security COLA was zero for both 2010 and 2011, 3.7 percent for 2012, and will be 1.7 percent for 2013. The average dollar increase in Social Security next year will be about $21 per month; it would have been about $17 per month if Social Security had based the increase on the chained-CPI.
Earlier this year, the CBO estimated that if the federal government had moved to the chained-CPI on Jan. 1 2012, it would save more than $220 billion over 10 years. The net savings would be considerably lower if Congress adopts measures to soften the blow to the most vulnerable Social Security recipients.
Who would be hurt?
In general, people who would be negatively affected by the use of the chained-CPI would be retirees and other beneficiaries who receive most of their income from Social Security and who aren’t in a position to switch to other goods and services when prices rise.
For example, Medicare premiums and out-of-pocket medical expenses take up a large share of many retirees’ budgets. Many retirees have no alternative to Medicare, so for these people the only “substitution” for medical care paid under the program is to go without it.
With Social Security, one reason that’s a concern is that millions of seniors depend on the program just to get by. According to the Social Security Administration, 86 percent of U.S. households with one member aged 65 or older, or nearly 39 million Americans as of the end of 2011, receive Social Security benefits. For these households, Social Security income represents the largest component of their total income, at 37 percent, followed by wages at 30 percent.
You might think, what’s the big deal if 37 percent of a retiree’s total income grows at a slightly lower rate? But averages can be deceiving.
According to government statistics, median income for people over age 65 is roughly $20,000 a year. Social Security provides at least half of total household income for 65 percent of all aged beneficiaries. And for non-married beneficiaries, that figure rises to 74 percent, or nearly three-quarters of their income.
For more than a third of of all older beneficiaries, Social Security provides 90 percent or more of total income, while for non-married beneficiaries that figure rises to 46 percent. These are the people who would suffer most under a chained-CPI, a group that encompasses more than one-third of all Social Security beneficiaries and almost half of all single participants in the program, many of whom are elderly widows.
Nine percent of the elderly population have incomes below the poverty line, while another 5.7 percent are defined as “near poor,” with incomes between 100 and 125 percent of the poverty lines. So a total of nearly 15 percent of Americans considered poor or near-poor. This percentage is 7.3 percent for all married people, 21.9 percent for single men, and 24.8 percent for single women. These figures are even higher African-Americans and Hispanics.
Let’s take a quick look at one aspect of the substitution issue. The average monthly benefit for new retirees in 2011 was $1,241. In 2011, the Medicare Part B premium for most new retirees was $115.40 per month, representing almost 10 percent of their monthly check. That’s for single retirees; the percentage increases to over 13 percent for married retirees. And that’s not even counting out-of-pocket medical expenses.
There’s no way to substitute for Medicare premiums, and it’s difficult to substitute for out-of-pocket medical expenses. In other words, paying for these premiums and expenses represents a real financial hardship for the one-third of aged beneficiaries around the country for whom Social Security represents almost their entire income.
The bottom line: The elderly poor, singles, widows, widowers, and non-whites will be most negatively affected by shifting to a chained-CPI approach to calculating Social Security cost-of-living adjustments. If you count just those retirees whose Social Security benefits represent 90 percent of their total income, that’s over 13 million Americans.
Asked what the Obama administration would do to these retirees, White House Press Secretary Jay Carney said last week that the “oldest of Social Security recipients would be potentially protected from the impact of a change like this.” He declined to offer details.
The Simpson-Bowles recommendations on Social Security attempted to soften the impact on the elderly poor by proposing a minimum Social Security income. If your Social Security income as increased by the chained-CPI fell below this minimum income, then you’d be paid this minimum income instead.
Another possible fix would be to continue using the current COLA for the Supplemental Security Income program, which provides additional support to impoverished elderly, disabled and blind people.
It’s not clear if and how a minimum benefit under Social Security or exemptions for the SSI program might work their way into the fiscal cliff negotiations. Any of these fixes impose a “cost” by reducing the savings in the federal budget.
The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.