Is The Chained CPI the Right Fix For Social Security?

One of the most controversial elements of President Obama’s 2014 budget is the proposal to reduce future cost-of-living adjustments to Social Security benefits by changing the inflation index. The Social Security Administration now bases inflation adjustments on the consumer price index for urban wage earners and clerical workers (CPI-W), a close cousin of the more widely publicized CPI for all urban consumers (CPI-U). The administration proposal would instead use a relatively new index called the chained CPI, or C-CPI-U, which, in the past, has increased slightly less rapidly. Predictably, deficit hawks love the idea, while seniors and those who defend their interests, hate it. Suppose, though, that we set ideology and interest group politics aside to look at the underlying economics of the issue. On those terms, is the switch to the chained CPI the right fix for Social Security?

What exactly are we trying to fix?

Before we start fixing something, we should be sure we know what is broken. Is a flawed method of inflation adjustment really a major problem? Would fixing it, in isolation, really improve the functioning of the Social Security system as a whole? Or is it just an attempt to disguise an unpalatable cut in benefits as a minor technical correction? If what we really want is an across the board cut, why?

It is sometimes argued that we can afford to slow the growth of Social Security benefits because seniors are no longer as economically disadvantaged as they once were. Consider, for example, the dramatic decrease in poverty rates among the elderly over the past half century. As the following chart shows, in the 1960s, when the government first began to publish official poverty statistics, people 65 and older had the highest poverty rates of any age group. Today they have the lowest rate.

Taken at face value, these trends appear be consistent with the notion that seniors have more than kept up with inflation. However, a closer look at the income status of older Americans raises some doubts about that. One difficulty is that the official approach to measuring poverty probably overstates the standard of living of seniors.

The shortcomings of the official poverty measure are well known. In its original form, it simply multiplies the cost of an economy food plan by three. As a result, it fails to take into account the increasing relative prices of budget elements other than food, the impact of taxes, and the value of in-kind government benefits like SNAP (formerly food stamps), Medicare, and Medicaid. Other problems include inadequate attention to regional differences in living costs and an inadequate view of family structure.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Two years ago, the Census Bureau introduced a new Supplementary Poverty Measure (SPM) that tries to address these problems.The SPM begins from a minimum budget that includes not just food, but food, shelter, clothing, and utilities (FCSU). The FCSU budget is then multiplied by 1.2 to allow for other expenditures, and it is further adjusted for family size and regional differences in housing costs. The SPM then compares the resulting minimum family budget to a measure of resources that adjusts the old cash income concept in three ways. First, it adds the value of in-kind benefits that families can use to meet FCSU needs. Second, it subtracts net taxes. Third, it subtracts other necessary expenses, of which out-of-pocket medical expenses are one of the largest.

As the next chart shows, the SPM increases the estimated poverty rate for the whole population only modestly, from 15.2 percent to 16 percent for 2010. However, the impact varies widely by age group. In particular, the poverty rate for people aged 65 and older jumps from 9 percent to 15.9 percent, which is close to the average for the population as a whole. A large part of that increase comes from the way it takes into account out-of-pocket medical expenses that reduce household income available to meet FCSU needs.

A poverty rate for seniors no lower than that for the population as a whole already undermines the case for less generous cost-of-living adjustments to Social Security, but there is more. We should look not just at the poverty rate among seniors, but at the entire distribution of income for the elderly population. According to CBO data, presented in the next chart, that distribution is far less equal than for the rest of the population, and, as for other age groups, it is becoming even more unequal over time.

The chart shows Gini indexes for various population groups based on market income, a measure that does not include Social Security or other government benefits. A higher value of the Gini index means more inequality. The picture we get is of an elderly population in which a relatively few wealthy households account for most of the market income, while many of the rest are highly dependent on Social Security benefits.

That picture is confirmed by data from the Original post

Written By: Ed Dolan