Dean Baker: The Washington Consensus Wants To Cut Social Security Benefits With A Chained CPI [View all]

[Better Believe It]

Playing Inflation Games with Grandma: The Washington Consensus and the Chained CPI
By: Dean Baker
April 5, 2012

All the inside Washington types seem to agree, we should change the indexation of Social Security benefits to the chained consumer price index (CPI). This would supposedly make the annual cost-of-living adjustment (COLA) more accurate and save the government big bucks. Sounds great, right?

At the most simple level, the switch to a chained CPI (Consumer Price Index) is a way to reduce the annual COLA (Cost of Living Allowances) in Social Security by roughly 0.3 percentage points. That may sound trivial, but it is important to remember that this sum adds up over time. After ten years, this lower annual cost-of-living adjustment would imply a reduction in benefits of roughly 3 percent, after 20 years the reduction would be 6 percent, and after 30 years close to 9 percent. So this is real money.

The Bureau of Labor Statistics (BLS) has done research indicating that the Social Security population has qualitatively different consumption patterns than the rest of the population. This research suggests that a consumer price index based on the consumption patterns of the elderly would show a higher rate of inflation.

This is a simple way to distinguish between people who want an accurate COLA and people who just want to cut benefits. Those who want an accurate COLA advocate having BLS construct a full elderly CPI. People who just want to switch the indexation to a chained CPI simply want to cut benefits.

Read the full article at:

http://my.firedoglake.com/deanbaker/2012/04/05/playing-inflation-games-with-grandma-the-washington-consensus-and-the-chained-cpi/