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Are the negatives of Chained CPI being overly hyped?

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  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    Chained CPI...an alternative perspective

    Anyone who has been watching the news will by now know that President Obama has proposed changing the way inflation indices are calculated for determining Social Security benefits for retirees. Currently the Bureau of Labor Statistics index called the CPI-W is used; the proposal is to switch to the C-CPI or "Chained CPI" index. This has enraged many liberals as the media has hyped the cumulative magnitude of the adjustment on retirees projected 10, 20 or 50 or more years into the future.

    I won't get into all methodology of the two different calculations in this post. Anyone can look that up.

    However, I did spend some time researching the difference between CPI-W and C-CPI to see if those fears hold up. I down loaded all the Bureau of Labor Statistics into a spreadsheet for both indices on a yearly basis since 1999, the first year the C-CPI was calculated. My first observation was that the two indices do not track exactly...most years the CPI-W is higher, but there are some years in which the difference is negligible or the C-CPI is a bit higher. As a whole, the CPI-W averages about 0.3 percent higher, but if one was to examine just the last four years, the C-CPI (the Chained CPI) would have resulted in better inflation adjustments averaging 2.1 percent per year versus only 1.3 percent for CPI-W.

    In particular for 2009 and 2010, two years in which Social Security retirees got zero cost of living increases based on CPI-W, if C-CPI had been used instead, retirees would have received a 2.5 percent increase for 2009 and 1.3 percent for 2010. For the year 2012, an increase of 1.7 percent was given based on CPI-W, but the equivalent C-CPI was only slightly lower for that year at 1.6 percent. The average 2013 Social Security retirement benefit is $1,230 per month according to the SSA. Applying the alternative one year C-CPI, that monthly amount would have only been reduced by $1.23...that's right, slightly more than a dollar a month or $15 per year for current recipients.

    Of course, one or two year anomalies are not indicative of how the future will behave. One of the reasons for zero inflation adjustments in 2009 and 2010 was that gasoline prices and housing prices dropped, but the C-CPI mitigated some of these decreases by more flexibility in the way it handles year to year fluctuations.

    Going forward, the Congressional Budget Office projects an average difference of 0.25 percent between the two indices. That means that the average monthly SS paycheck in 2014 would be $5.07 more under the current CPI-W than under C-CPI...or $60.90 cumulative for the whole 12 months of the year.

    Projecting the Congressional Budget Office estimate of 0.25 percent difference 10 years into the future, the incremental difference between the CPI-W and Chained CPI works out to a cumulative 2.53 percent ($36) in the year 2022...or $1,456 per month versus $1,420 for chained CPI. Of course if you project this difference 50 years or more into the future, multiplied by over 50 million recipients you'll get the big type of numbers that are currently being bandied about in the media.

    A lot can happen in the next 50 years that will make all of these projections obsolete. In the meantime, I just can't get worked up about that small incremental difference. There are much bigger fish to fry, and if President Obama can horse trade this inflation index for something that gets a more immediate benefit, like spending on education and infrastructure, then I'm all for it.

    Comments invited...
  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    I will add that much of the political discourse has focused on the "elderly" who some politicains and media say would be most hurt by chained CPI for Social Security. However, this is from the Center on Budget Policy Priorities:

    "The Congressional Budget Office (CBO) assumes that the chained CPI will grow by about 0.25 percentage points per year less rapidly than the regular CPI.

    "While the budget would apply the chained index to the computation of cost-of-living adjustments (COLAs) in Social Security and federal retirement programs, it exempts means-tested programs, notably Supplemental Security Income for very poor seniors and people with disabilities.

    "The budget also provides special protection from the switch to the chained CPI for the oldest seniors and others who receive Social Security for a very long time. That would take the form of a special increase — equal to 5 percent of the average retiree benefit, or about $750 a year in today’s dollars — for long-term recipients, phased in gradually for elderly beneficiaries between ages 76 and 85 and for disabled beneficiaries who have been on the rolls for 15 years or more. The adjustment would start in 2020.

    "A laudable feature of the proposed benefit “bump” is that it gives more help to seniors receiving smaller Social Security benefits. All beneficiaries would receive the same basic dollar increase, which would translate into different percentage increases in benefits — 5 percent for an average beneficiary, about 10 percent for a low-paid worker, and about 2 percent for those at the top. Both the benefit “bump” and this progressive feature were part of both the Bowles-Simpson and Domenici-Rivlin deficit-reduction plans."


    So again, that seems fair to me. I don't see chained CPI as a very big deal, and I think President Obama thinks likewise.
  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    I notice in other posts and media reports that even Elizabeth Warren has turned against President Obama on his advocacy for chained CPI. The more I read about chained CPI, I'm wondering if it's a concocted issue. Referring to the budget estimate of the 10 year effect on Social Security benefits, Peter Orszag in Bloomberg News had this to say:

    "These official estimates all assume, however, that the chained index grows 25 to 30 basis points more slowly than the standard indexes do. That’s a reasonable assumption based on the average difference in how fast the indexes have risen over the past 13 years. From January 2000 to January 2013, the chained CPI rose 27 basis points more slowly each year, on average, than the CPI-U and 29 basis points more slowly than the CPI-W.

    "Over the course of those 13 years, however, the differences between the annual growth rates of the indexes have become substantially smaller. From January 2000 to January 2003, the annual increase in the chained index was 47 basis points lower than that in the CPI-U. From 2003 to 2006, the difference was 31 basis points. From 2006 to 2009, it dropped to 15 basis points. And over the past two years, the average difference has been just 11 basis points.

    "Why is this happening? Examining the subcomponents of each index, it appears that housing and other goods and services have played a role. Sorting through the causes is complex, however. In any case, the more relevant question is, what is the best time period to use as a historical basis for projecting future differences in the indexes?"


    Orzag goes on to suggest that the forward projections of the effect of chained CPI versus CPI-W might be considerably less...maybe only 10 basis points instead of 25 to 30. I might suggest the difference is negligible.

    Consider this: If President Obama had proposed chained CPI in 2011 after two years of zero cost of living adjustments based on CPI-W, and if he and the media had pointed out that had we applied chained CPI for those two years, the retirees would have received a 2.5 percent increase for 2009 and 1.3 percent for 2010....then chained CPI would have been an easy sell.

    I think President Obama certainly understands that the effect of chained CPI has been way overstated, but in his budget negotiations he has to go along with the false narrative that it is a killer for Dems. He needs to horse trade something with Republicans, and why not chained CPI if chained CPI doesn't make that much difference?

    I spent hours combing through the Bureau of Statistics reports, and I cannot see that it would make any difference. In fact in some scenarios like the period 2009 - 2012, chained CPI would have come out better for seniors.