Chaining seniors to poverty

The latest deficit-cutting proposal in the fiscal cliff negotiations has seniors up in arms. President Barack Obama and House Speaker John Boehner have agreed to a new measure of inflation that would reduce annual cost-of-living adjustments, or COLAs, for Social Security and other government programs.

The new measure is called the chained consumer price index (CPI). If adopted, it would have far­ reaching effects because annual adjustments to many government programs are based on year-to-year changes in consumer prices.

The change is another assault on the once sacrosanct middle-class safety net. According to the Congressional Budget Office, Social Security payments would be $108 billion less over 10 years with chained CPl.

When certain products become more expensive, consumers switch to cheaper ones. Chained CPI attempts to account for that by looking at purchasing changes over time and linking, or chaining, the data together. For example, if beef prices rise faster than chicken prices, consumers will substitute chicken for beef.

So chained CPI takes spending changes into account, not just the price of goods. Nearly every conversation about using chained CPI is based on the notion that market exchanges are always voluntary, the products equivalent and that the elderly use the same goods as other Americans. They ignore how much more seniors spend on health care, the cost of which is increasing at an alarming rate.

Under chained CPI, annual increases in Social Security payments, government pensions and veterans’ benefits would, on average, be reduced by about 0.3 percentage points annually. For example, next year’s 1.7 percent COLA would be about 1.4 percent.

Changes to ¬∑Social Security are politically delicate because the program touches so many people. Nearly 56 million people -one out of every six Americans -receive Social Security benefits. The program accounts for about 20 percent of the Federal government’s $3.7 trillion in spending.

The average annual retiree benefit is $14,800. Those with lower wages get less and those who had higher wages get more; even Warren Buffett gets a Social Security check.

It is estimated that nearly half of Americans 65 or older would be below the poverty line if not for Social Security; a quarter of the elderly get at least 90 percent of their income from the program. Given their standard of living, many retirees are already making onerous trade-offs.

For a long time, there was more money coming into the Social Security Trust Fund then going out. The surplus was turned over to the Treasury, which promptly spent it.

Still, the Trust Fund is sound until 2036. So why is Social Security even part of the fiscal cliff negotiation? It is not driving the deficit. The gap going forward between revenue and expenditures for Social Security does create problems over the long run, but they are manageable.

If we really want to protect Social Security, remove the $106,800 income cap that results in less than 86 percent of wages being subject to the payroll tax. Economists estimate that taxing incomes over $106,800 would entirely eliminate the projected Social Security shortfall over the next 75 years.

Other common-sense reforms include reducing or eliminating benefits for the wealthy and raising the retirement age to reflect longer life expectancy.

Still better, subject investment gains to the payroll tax. Hedge fund managers’ earnings are taxed at the capital gains tax rate of 15 percent instead of being treated as ordinary income taxable at 35 percent.

All these reforms could be phased in over 20 years. Finally, we have to make Social Security a real trust fund, insulating it from Washington politicians who raid it and use the money for other programs.

These are the adjustments politicians should be considering, not technical tweaks in the cost-of-living formula that are not widely understood and are easily manipulated.

We face trillion-dollar annual deficits and total debt of more than $16 trillion. But the Washington political class is talking about $2.4 trillion in new revenue and spending cuts over 10 years.

Clearly there is much to be done, but we shouldn’t do anything to Social Security right now. That should work because the folks in Washington are awesome at doing nothing.

originally published: December 29, 2012

Questionable calculations keep checks small for people who have shrinking options

As the prolific and insightful author anonymous once said: “The two things you don’t want to see being made are legislation and sausage.” The latest evidence for this same observation is how the federal government manages and calculates the Consumer Price Index.

Looking at how the CPI is calculated shows how inflation is underestimated and denies Social Security recipients full cost of living adjustments, eroding the real value of their Social Security income.

For the uninitiated, the standard CPI is the benchmark measure of inflation calculated monthly by the U.S. Department of Labor’s Bureau of Labor Statistics. Widely used and closely watched, the federal government uses it for multiple purposes. For example, the CPI is the standard means for adjusting Social Security benefits paid monthly to about 56 million Americans. The goal of this cost-of-living adjustment, first paid in 1975, is to prevent a decline in the purchasing power of retirees’ benefits.

However, 35-plus years later, elders and Social Security recipients are being hammered by how government measures inflation. Here’s how.

Let’s consider the inflation rate, a key driver of the CPl. If the federal government mistakenly underestimates the rate of inflation as part of the standard CPI, Social Security recipients receive a smaller earned benefit check than they need to stay even. From Quincy to Carlsbad, Calif., understating inflation means a substantial reduction in retiree’s standard of living. For the feds, understating inflation makes real GDP growth appear higher and makes budget deficits seem smaller.

For starters, in the turbulent decade ofthe 1970s the concept of”core inflation” was invented by the feds by subtracting food and energy in calculating CPl.

The feds argued for this changed definition of inflation because oil and food prices -two large components of the average family’s budget- were rising too rapidly, outpacing the rest of the economy.

Does it still make sense to exclude these two categories? Certainly, food and energy have been going up for quite some time. And fundamental global demand for food and fuel, in particular, have changed dramatically: surely these impact inflation on a consistent basis? Fortunately for our seniors, the core CPI is not used to set Social Security payments.

Then a few vintages ago in the mid-1990s, more changes were made in the standard CPI methodology that understates inflation. Experts argued that when consumers could no longer afford the rising price of a specific product, they would purchase a cheaper substitute. If steak, for example becomes too expensive, the consumer would switch to hamburger. Brand names give way to generics. And so on. So the CPI would reflect hamburger price for consumer meat purchases, not steak. Does this change in methodology reflect price changes? But wait- as with the Ginsu knife- there’s more! The CPI was also adjusted for “quality effects”. So if a car costs 10 percent more, but it is 10 percent higher in quality,  then presto there is no inflation to report. Same if a basic computer is 10 percent faster: a 10 percent increase in the price is not really inflation. Higher prices for gasoline subject to the government mandated use of ethanol are also left out because we get a “quality” improvement from breathing cleaner air.

We could go on but you all catch what the joke is now. When you consider how the CPI is managed and calculated, it raises the basic question never to be mentioned in mixed company: Is it a measure of inflation or is it pure propaganda? To be totally kosher, a combination of Fed policy of keeping interest rates low through the end of 2014 and the likelihood that the CPI understates inflation punishes our seniors. Many of whom are already living close to the ground; chasing certificates of deposit and other safe investment yielding less than 1 percent while their standard of living declines. Indeed, these interest rates are below the rates of inflation. Not only is their income lower but the effects of inflation have eroded their buying power.

Our economy is not just moving slowly, it seems as if it’s trying to grow with the emergency brake on. Perhaps it is time to correct the CPI calculation to give our Social Security recipients what they need for essential items such as food, shelter, clothing, transportation, and medical care. Of course, trying to explain this to our political class in Washington is like trying to explain psychology to someone who has never met a human being.

originally published: July 7, 2012