Obama’s Budget Would Change How Social Security COLAs are Calculated

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Last week, President Obama submitted to Congress his version of a federal budget for the 2014 fiscal year. And soon, like the half-dozen other budget proposals that have been introduced by, and then summarily dismissed in, both the House and Senate, this latest budgetary scheme tossed into the maw of Washington’s partisan politics is destined to go nowhere.

DOA – just like almost every other piece of potential legislation that gets floated around the Capitol, lately. Because these days in D.C., nobody likes anybody else’s ideas about anything. And the Obama budget is roundly disliked by almost everyone.

Republicans don’t like it because it proposes new spending for road construction, more money for pre-K education and advanced manufacturing research, a higher minimum wage, and tax hikes for the wealthy, among other items that are anathema to the Grand Old Party. Mostly, though, they don’t like the Obama budget because, well, it comes from Obama.

But many Democrats are also angry that their president deigned to put Social Security savings into the plan in a way that will tend to lower benefits for current and future recipients — despite the administration’s promises never to do such an unpopular and unnecessary thing.

The questionable change that riles many of the president’s own party mates would replace the government’s traditional consumer price index (CPI) that is used to make cost-of-living adjustments (COLAs) in programs such as Social Security, veterans’ benefits, and food stamps, with what is known as the “chained CPI.”

What is the Chained CPI?

Basically, the CPI, which is calculated by the Bureau of Labor Statistics (BLS), is a formula that looks at how the prices of 200 different categories of things we buy, increase over time due to inflation. When prices go up, COLAs kick in. The chained CPI is a little different. It measures not only the changing price of goods, but also factors in the recognition that certain purchasing decisions also change when prices do.

For example, if the price of apples goes up, people may not necessarily spend more money on apples – they might buy peaches instead if they are cheaper, thus “substituting” one similar item for another and, in this case, countering the apples’ rise in price. So the chained CPI usually registers about 0.3 percentage points lower than the traditional CPI and, according to the BLS, is a closer approximation of the actual increase in the population’s overall cost of living.

While a 0.3 percentage decrease doesn’t sound like much — $3 less on every $1,000 — when compounded over time, it can grow into hundreds or even thousands of dollars of difference in future Social Security payouts. And since nearly two-thirds of recipients rely on Social Security for at least 50 percent of their income, and over one-third of seniors rely on Social Security for 90 percent of theirs, the hit can be substantial.

Here’s some quick math: This year the COLA was 1.7 percent. Thus, last year’s monthly Social Security check of $1,250 increased to $1,271.25. If the chained CPI had been used instead to calculate the increase, the percentage would have been 1.4 percent and the amount would have been $1,267.50 – $3.75 less per month and $45 less for the year.

By compounding the decrease over time, the cut would be about 3 percent after 10 years, 6 percent after 20 years, and close to 9 percent after 30 years – a reduction of $1,400 annually for a 95 year-old retiree in 2043. According to the Congressional Budget Office, computing Social Security COLAs with the chained CPI would save the system $112 billion over its first decade.

Detractors of the president’s plan argue that that the chained CPI should not be implemented for Social Security because it does not adequately reflect the spending patterns of seniors. While a younger person may decide to buy cheaper peaches if the price of apples goes up, seniors spend a disproportionate amount of their incomes on housing and health care, two categories that defy the possibility of “substitution,” the concept on which the chained CPI depends. In fact, they maintain that even the traditional CPI underestimates the effects of inflation on the elderly and is at least 0.2 percentage points too low, as it is.

Reducing Social Security Benefits Will Not Reduce the Deficit

Why the mad dash to change the way COLAs are calculated? Well, it all has to do with Washington’s newfound fetish about “cutting spending” and “reducing the deficit” – now the preeminent policy goals of our nation’s elected leaders and the political class’s most fervent pursuit — despite evidence to the contrary that suggests that the deficit is already coming down and that cutting spending in a time of high unemployment actually retards growth and increases societal suffering.

And yet, it seems that in order to placate the deficit hawks in Congress, the president has offered up the resources of one of society’s most vulnerable cohorts as his ante into the next round of negotiations that will undoubtedly take place after his budget proposal gets shredded by both the right and the left and lies limp and lifeless in a pile with all the rest of its scorned predecessors. DOA all over again.

But the most truly bizarre aspect of this burning desire to cut Social Security benefits in Washington’s current “reduce spending and cut the deficit” jihad, is the fact that Social Security is not even a part of the country’s general budgetary package in the first place. It is a separate program, financed not by income, excise, estate or any of the different taxes that fund the federal government, but by the stand-apart FICA, or payroll, taxes we all contribute with every paycheck. In other words, the revenue stream that funds its expenditures, and those expenditures, themselves — which are the monthly paychecks to country’s retirees — sort of run parallel to any general budget resolution that would eventually become law.

That means that even if Social Security payouts do diminish, which would save the Social Security system, itself, money, it has nothing to do with reducing the deficit — that long-term negative number that the government has created over the years by spending more from its general budget than it has taken in.

So not only does using the chained CPI make no sense on a personal level — unfairly impacting the country’s seniors who have already witnessed a severe waning of their wealth over the last several years — it makes no sense on a budgetary one either.

But these days, Washington is becoming more and more like a through-the-looking-glass universe; a place where taking money away from our neediest citizens is viewed as the only practical way to save the republic, and advocating for wrongheaded policies — at least in the warped mirrors of the funhouse — makes one look caring and intelligent.

So, maybe it’s just as well that nobody likes anybody else’s ideas in our nation’s capital any more. After all, so many of them are so remarkably bad.



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