"Chain, chain, chain, chain of fools." -- Aretha Franklin
Aretha was singing about a cruel lover. But her complaint applies equally well to another kind of foolish chain that's become a household word during this summer of federal budget battles: the "chained CPI."
That's shorthand for a policy idea kicking around Washington that would change the way inflation is measured for a variety of federal benefits and tax schedules.
Seniors have been hearing about the chained CPI lately in the context of Social Security -- which is one of the few retirement benefits that comes with built-in protection against inflation.
Social Security has had an automatic cost-of-living adjustment (COLA) since 1975; seniors were paid a COLA every year from that point up until 2008, but since then -- nada.
Social Security's COLA currently is determined using a particular measure of the Consumer Price Index, called the CPI-W. Uncle Sam's stinginess resulted from a quirky spike in that index in the third quarter of 2008. Just before the economy crashed, the CPI-W spiked temporarily due to a big increase in energy prices. The result was a whopping 5.8 percent COLA for 2009. Social Security payments can't rise until the CPI-W exceeds the 2008 level -- and they can't fall under federal law -- so benefits were held level in 2010 and 2011.
A 1.1 percent COLA is forecast for 2012 by the Congressional Budget Office (CBO).
Meanwhile, the debate in Washington about debt ceilings and budget deficits has brought COLAs front and center.
Several of the key federal deficit reduction plans that have been advanced recommend replacing the CPI-W with a chained CPI. A chained index reflects changes that consumers make in their purchasing across dissimilar items in response to price changes; the theory is that a spike in gasoline prices will prompt consumers to spend less on fuel, perhaps more on food. (Or, as a reader of an earlier story I wrote on this subject quipped in an online comment: "Sure, when the price of steak goes up, people switch to chicken. And when the price of chicken goes up, old folks will switch to cat food.")
The chained CPI could be applied to federal benefit programs and to the income tax code -- although it stands to generate far more benefit cuts than revenue gains.
On the benefit side, a chained CPI would impact Social Security, civilian and military pensions and veterans' benefits and Supplemental Security Income. On the revenue side, a chained CPI might be applied to inflation adjustments for tax brackets in the personal income tax code, effectively serving as a stealth tax hike by reducing tax bracket adjustments and subjecting more of individuals' earnings to higher tax rates over time.
According to the CBO, benefit adjustments could yield $217 billion over 10 years, with 52 percent of that -- $112 billion -- coming from reduced Social Security COLAs; income tax bracket creep would generate $72 billion.
Here's what makes the chained CPI especially controversial insofar as Social Security is concerned. Whenever Social Security has undergone reforms in the past, the changes almost always have been scheduled far down the road and implemented gradually over many years, so as not to impact current beneficiaries already counting on a specific benefit. But shifting to a chained CPI would affect today's seniors.
The chief actuary of the Social Security Administration estimates that the chained CPI will rise about 0.3 percentage points less per year than the CPI-W. With compounding, that translates to a monthly benefit cut of 8.4 percent for a retiree at age 92 (calculated from age 62, the first year of benefit eligibility), according to the National Academy of Social Insurance (NASI).
That takes us in exactly the wrong direction on COLA policy. If anything, the current CPI-W measure understates the living costs experienced by seniors -- especially healthcare costs. Healthcare inflation has far outpaced general inflation for several decades.
Since 1988, the U.S. Bureau of Labor Statistics (BLS) has maintained an experimental index, the CPI-E, which aims to reflect the spending patterns of people over age 62. Used instead of the CPI-W, it would translate into monthly benefits about six percent higher for a retiree at age 92, NASI estimates.
"Since most of the deficit reduction (that would result from using the chained CPI) comes from cutting benefits for elderly and disabled Americans, it does point one back to the question of whether the chained CPI is more accurate for elderly and disabled Americans," says Virginia Reno, NASI's vice president for income security. "Evidence suggests it is less accurate than a CPI for the elderly, because it fails to reflect the significantly larger role of out-of-pocket health spending by seniors and disability beneficiaries.
Proponents of a chained CPI usually describe it as a technical correction to make COLAs more accurate -- and a geeky topic only an economist could love. But it actually will have major implications out in the real world. So, no matter where this summer's fiscal debate goes in Washington, expect discussion of this rather foolish chain to stay hot.
© 2011 TRIBUNE MEDIA SERVICES, INC.
Comments:
Since this is a forgone conclusion, in essence 'gonna happen', write your Congressman/woman to insure the d-mn thing is annexed for inflation. This will, at minimum, insure no change of tax brackets without an equally large increase of salary - called bracket creeep, or in olden days 'the AMT'! Stick it to 'them' before they can stick it to you!
Josh the Gen-xer... What it was sold to be in Congress and to the American tax payer in 1935 by FDR, was not anything like it has turned out to be. Now you and your employer pay about 15% of your income, up to $106,000. Into the fund. Then when you retire all of the young people that are working... Pay your benefits, forever, until you die. Regardless of how long you live. As long as the workforce is growing, that might work. When you have the reduction in the workforce like we do now... That doesn't work. Plus our elected officials kept revising the SS Act to allow more and more people to collect against the funds that workers paid into... Even though they had never paid into it. Then when Lyndon Johnson wanted to pass the Medicare and Medicaid bill, and couldn't get it through Congress on it's own merit... He made a supplement to the SS Act of 1935. He also did that so he did have to fight with the Courts as to what to do with the money collected from your pay check. SS had already fought that battle. That's why what you pay in goes to the General fund of the Treasury Dept. Not a lock box. So to answer your question is it a welfare program... Not Legally but in reality? There is no way in hell the average worker will ever pay in anywhere near as much as he will collect if he lives a full life and dies of natural causes. It is assumed that the average worker will collect 3 times what he has paid in. Call it what you want!
Phil Bock... FDR lied to Congress in 1935 about the Lock Box... to pass the Social Security Act. That account was never started. Later when there was a lot of cash piling up at the Treasury, they started to invest it so they could make a profit on those assets and help insure that the fund would grow. However at that time the Federal Reserve complained that having all of that money introduce to the Market would interfere with private investors and them. So it was agreed at that time that the Treasury would not put that money into the market, they would only buy Treasury notes, at a much lower profit capability. Yes, like Michael said below, we were screwed!
People... If you would do your homework you will find that our elected officials, both Federal and State, have spent us into doom and gloom. They will give anyone anything to get reelected... Even though they know there is no way in hell that it can ever be paid for. It is estimated that if you combine all debt of both the Fed and the States, both funded and unfunded that amounts to about $211 trillion dollars. There are only about 89,000,000 people or Companies that actually pay taxes in America... All of these promised programs are depending on these same taxpayers to fund them. That is impossible! So... At the end of the day, lots of these programs have to be eliminated or greatly reduced. They say in coming years that Social Security, Medicare and Medicaid alone will require 100% of all taxes collected to stay afloat. Do you really think that they are going to let that happen? What FDR and LBJ weren't counting on when they started these Ponzi Schemes was such a large reduction in the birth rate in America. That's why both parties have turned a blind eye to illegal immigration for the last 30 years. They need more people to pay taxes and to pay into these three programs. It is a big bonus if they pay into it will a stolen SS number. They way they pay in but can never collect on what they paid it. That helps keep these programs afloat... A little longer but not forever. Trust me, over the next 30 years you will see many Federal and State programs eliminated or greatly reduced!
Social Security was setup as a separate entity within the government like a savings account for those who were working and contributed to it. The government was not supposed to be able to use that money for any reason at all. But somehow they found a loophole and for the past number of years have been taking out huge sums of money from this account and replacing them with IOUs. Since our economy is in such serious trouble, there is no way they will ever be able to replace that money. Fewer and fewer people are working these days so that means less and less money is going into the social security fund, which again, was supposedly setup so that no other part of the government could take it. Basically our government has robbed us. It's just as if we had a savings account in the bank and some came in and took all the money you had in that account and left you an IOU. The government keeps raising the age at which you can start collecting. There is already a proposal being made to increase the age to 78 years old. In other words, they want to get it so high that a person will die before they are eligible for social security. Like Michael (below says) "We're screwed."
Social Security was setup as a separate entity within the government like a savings account for those who were working and contributed to it. The government was not supposed to be able to use that money for any reason at all. But somehow they found a loophole and for the past number of years have been taking out huge sums of money from this account and replacing them with IOUs. Since our economy is in such serious trouble, there is no way they will ever be able to replace that money. Fewer and fewer people are working these days so that means less and less money is going into the social security fund, which again, was supposedly setup so that no other part of the government could take it. Basically our government has robbed us. It's just as if we had a savings account in the bank and some came in and took all the money you had in that account and left you an IOU. The government keeps raising the age at which you can start collecting. There is already a proposal being made to increase the age to 78 years old. In other words, they want to get it so high that a person will die before they are eligible for social security. Like Michael (below says) "We're screwed."
Just another deception put on the American people by a group of people who can't be honest with the citizens of this country. Many will be unable to understand the contortions made by the government and not know they are being ripped off. I just spent the last year working a study on inflation - start looking into substitution and hedonics which are already being used to distort real inflation rates and your head will spin. Just more DC games that sadly affect real people.
I understand that Fuel and Food are not included in the CPI-W adjustment... thus no increase in SS payments in 2009 & 2010. These folks obviously haven't been to the grocery store or bought heating oil or gas the past couple of years in addition to the increase in Health Insurance costs.
Is SS a welfare program or a funded pension? Not at all clear which one it really is, and the answer to the question dictates how it's reformed. And of course it has to be reformed. Income up, expenses down, in some ratio and combination.
Were screwed!!!!