What If Chained CPI Had Been Used to Calculate COLAs Since 2002?

by Chris Sturr | November 03, 2013

(I have been meaning to post Lou Reed’s “Strawman.” My favorite line: “Does anybody need another president?”  The rest of the lyrics are pasted below; click here if you don’t see the embedded video.)

Doug Short at Advisor Perspectives had an informative piece on the Chained CPI (posted in the links section of Naked Capitalism). The table showing what difference the Chained CPI would have made over the past ten years is especially useful.  It confirms what our columnist John Miller said in his piece in our May/June issue, The Chained CPI Is Bad for Seniors and for Accuracy:

The long and the short of it is that the chained CPI reports a lower rate of inflation than the fixed-basket CPI-W. The Social Security Administration estimates that using the chained CPI instead of the CPI-W would reduce annual Social Security COLAs by about 0.3 percentage points per year. If the chained CPI had been used to calculate the Social Security COLA, the average retiree would have gotten $45 less in benefits this year.

Perhaps it is these small figures that have the Post editors convinced that AARP is “wrongheaded” about the switch. The loss of benefits, however, gets larger each year, and the cumulative effect is substantial. The average 65-year-old is now expected to live about 19 additional years. According to AARP projections, a chained-CPI COLA would cost the average Social Security retiree more than $5,000 over the first 15 years of retirement and more than $9,000 over the first 20.

Doug Short’s table makes the cumulative effect vivid. I was thrown off at first because the COLA measure that’s used now (CPI-W) is the same for 2014 as the Chained CPI (both are 1.5%), yet the table shows a decline of $552 for 2014 if the Chained CPI had been in effect.  But that’s because of the cumulative effect–the table shows what would have happened to someone whose payout was $12K ($1K/month) in 2002;  all those declines in the intervening years make for a decline in 2014 even if the COLA is the same.

Here is Short’s analysis, which I gather he updates every year:

Each year the Social Security cost-of-living adjustment COLA is calculated based on the change from the Q3 average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the Q3 average of the previous year, rounded to one decimal place. If the average for the most recent year is below the previous high, there is no adjustment, as was the case in 2010 and 2011. Note that for 2011, the Q3 average was indeed higher than the 2010 average, but it was still below the 2009 average, hence no COLA. For the official announcement of the calculation on Social Security website, click here.

The President’s 2014 proposed budget recommends that, starting in 2015, COLAs should be calculated with the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). Let’s look at what the effect would have been over the past twelve years for a typical Social Security recipient.

The earliest Q3 of Chained CPI data we have is for the year 2000. So the first COLA we can calculate would be for 2002 based on the change from Q3 2000 to Q3 2001. Here is a table showing the actual COLAs since 2002 and the hypothetical COLAs if we substitute the Chained CPI. I’ve illustrated the difference with a case history of a Social Security recipient who had received $12,000 in 2001, an even thousand per month, which I think was fairly close to the national average in that year. The rightmost column shows the annual and total shrinkage of annual income had the Chained CPI been used for COLA calculations.

When we compare the official COLA with the Chained CPI COLA in 2014 for our hypothetical retiree in the 13th year of retirement, the annual payout would be 3.4% less than with the traditional COLA calculation. In our illustration above, that’s about $46 less per month, which would buy a fair amount of groceries for a frugal shopper at Wal-Mart.

The Social Security COLA calculation involves rounding to one decimal place. Note that for 2014, the rounding gives us the first time in this 13-year data series (aside from the two years of no COLA) that the Chained CPI calculation would have been the same official CPI-W COLA.

As the table illustrates, over time the proposed switch to the Chained CPI for Social Security COLAs will substantially lower the cost to government … and the size of payouts to recipients.

The basic point about the Chained CPI, though, doesn’t require any numbers or analysis, and is implicit in Short’s last paragraph. It’s that no one who thinks that Social Security spending needs to be “reined in” would propose switching to Chained CPI if it didn’t reduce payment to recipients. But as John points out:

…reducing benefits is neither right nor necessary to avoid the projected shortfall in Social Security payments starting in 2033. Currently, wage income above $113,700 is not subject to the payroll tax. Lifting this cap would eliminate the entire projected shortfall in one easy step. And unlike a reduction in the COLA, which would hurt the most vulnerable, lifting the cap would put the burden on some of those who benefited most from the lopsided economic growth of the last three decades.

That’s it for today.  Here are those Lou Reed lyrics:

We who have so much to you who have so little
To you who don’t have anything at all
We who have so much more than any one man does need
And you who don’t have anything at all, ah

Does anybody need another million dollar movie?
Does anybody need another million dollar star?
Does anybody need to be told over and over
Spitting in the wind comes back at you twice as hard?

Strawman, going straight to the devil
Strawman, going straight to hell
Strawman, going straight to the devil

Strawman
Strawman
Strawman
Strawman, yes

Does anyone really need a billion dollar rocket?
Does anyone need a $60,000 car?
Does anyone need another president?
Or the sins of Swaggart parts 6, 7, 8 and 9? Ah

Does anyone need yet another politician
Caught with his pants down and money sticking in his hole?
Does anyone need another racist preacher?
Spittin’ in the wind can only do you harm, ooohhh

Strawman, going straight to the devil
Strawman, going straight to hell
Strawman, going straight to the devil

Strawman
Strawman
Strawman
Strawman, yes

Does anyone need another faulty shuttle
Blasting off to the moon, Venus or Mars?
Does anybody need another self-righteous rock singer
Whose nose he says has led him straight to God?

Does anyone need yet another blank skyscraper?
If you’re like me I’m sure a minor miracle will do
A flaming sword or maybe a gold ark floating up the Hudson
When you spit in the wind it comes right back at you

Strawman, going straight to the devil
Strawman, going straight to hell
Strawman, going straight to the devil

Strawman
Strawman
Strawman
Strawman

–Chris Sturr

 

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