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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.