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Social Security COLA for 2014 set at 1.5 percent

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  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    Social Security Website: Cost-of-Living Adjustment (COLA) Information for 2014

    The Social Security Administration has announced that Social Security benefits for qualifying seniors will increase by 1.5 percent for 2014. That number is about what everyone expected.

    Since AARP and a whole bunch of Democrats have been making noise about the perils of converting to a Chained CPI calculation, I thought I would look at how the Social Security COLA would compare if President Obama had "compromised" in his first year of office (2009) and agreed to change the way the COLA is calculated...that is using a Chained CPI on a full fiscal year basis (October 1 to October 1) instead of the CPI-W currently applied only on a 3rd quarter to 3rd quarter basis.

    --------COLA-------------------

    Year.....CPI-W .........Chained CPI

    2010..... 0.0 pct ..........0.0 pct
    2011..... 0.0 .............. 1.4
    2012..... 3.6 .............. 2.5
    2013..... 1.7 .............. 2.2
    2014..... 1.5 .............. 1.5

    The numbers in Table 24C of the Chained CPI link are on a monthly and calendar year average basis. I used the monthly numbers to convert to a fiscal year basis for my averages.

    As one can see, the Chained CPI would have given seniors a slightly higher COLA over the past five years. However, if you go further back in time the Chained CPI would be slightly lower. I don't think the differences going forward will be all that great, and I wouldn't mind if this part of Social Security calculation is modified to the Chained CPI as a part of a "Grand Bargain" to extract other benefits for seniors and low income people.

    If Obama needs a bargaining chip, this is what I would put on the table, not to give away, but to get something in return.
  • Liberal
    Independent
    Durham, NH
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    Thanks, good work!
  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    Schmidt, it seems like the White House wants tax revenue increases in exchange for the chained CPI 'cuts' as part of a "Grand Bargain," with the new tax revenues and the chained CPI 'savings' replacing the sequestration.

    From what I understand, chained CPI consistently underestimates inflation, and I'm pretty sure the 2013 and 2014 numbers you have there are subject to revision.

    Also, I'm reading some dense stuff but it looks like the sequestration is 'rolling' and that it caps and shrinks discretionary spending every year until an agreement is reached on mandatory spending cuts, or it is repealed.

    Anyways, I see blinking red lights that we are going into economic stall speed, and the odds are good that policymakers will freeze at the wheel, again, just like they did in '08 when a simple payroll tax cut might have staved off the worst financial crisis turned economic crisis in 70+ years.

    There is no evidence that the private sector credit expansion is rising to the challenge of overcoming the proactive gov't spending cuts + tax increases and contributing to total spending growth. Bank lending is negative. The gov't shutdown paralyzed home loans, small business loans, etc.

    So with gov't proactively tightening, it's up to the private credit expansion to win the seesaw battle against the demand leakages. If savings attempts are not offset by that amount of deficit spending by some other agent, they have the direct effect of reducing that amount of spending and incomes, leading to less overall savings, employment, output, etc. And the demand leakages vs. private deficit spending battles is prone to getting out of whack with ever increasingly levels of inequality. Case in point: because investment is a function of sales and demand, sky high corporate profits are being piled on the sideline, and not spent and recirculated back into the economy.

    So it's like, if the weight of the demand leakages wins, the credit expansion comes crashing down, onto the demand leakage side of the seesaw and they both fall down on the ground until gov't supplies the needed weight (gov't deficit) to keep it from falling over like that.
  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    Sorry for rambling on like that.
  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    CBB -- Thanks for sharing your input. You've covered several points and I agree with most of them; however, let me elaborate a little more.

    Regarding the Chained CPI, like all the other CPI indices (CPI-U and CPI-W), it is based on a basket of consumers goods and services assumed to be purchased by a consumer each month. Many of the complaints by seniors focus on the item/weights in that basket...some say it should put more weight on medical expenses as that tends to hit seniors more. I won't go into all that here.

    I have, however, spent time looking at the Chained CPI, and as a senior, I believe it is more accurate of the way we spend money. We are generally frugal, and we shop carefully, taking in sales and substituting other products when a particular product is priced too high. That's what the substitution part of the Chained CPI covers. In effect it's sort of a price-demand consideration on top of the other formula for assumed monthly purchases.

    To illustrate the point, both the CPI-U and the CPI-W have a fixed basket of products and services, and if the price of product X triples then the respective CPI's that include Product X also go up accordingly, depending on how much weight they assign to that product. However, if the tripling of the price pushes most consumers to Product Y, which is priced at half that of Product X, are those consumers really being hit in the pocket book by that inflationary increase in Product X? No...not as long as they have a choice. That's what the Chained CPI does...it assumes substitution although the way they handle it mathematically is mind boggling.

    Anther point I should make about CPI-W as it is used for SS COLA. Although the Bureau of Statistics calculates the number monthly, the Social Security Administration only uses a three month period (July, August, September) to calculate the changes in prices from year to year. Why these particular three months? I don't know...maybe it's a carryover from the days when we used calculators instead of computers, but they've been doing it that way for a long time. So what is unique about these three months? Well for one thing, food prices tend to be lower in these late summer months because farmers are harvesting their crops. Any spike in food prices in say January will not be reflected in these numbers. And home heating oil? Does anyone really believe that these three warm months are representative of the year as a whole? On the other hand, it's also hurricane season and gasoline prices can also be volatile in this three month period if the gulf coast infrastructure for oil and gas is threatened or shutdown. I could cite more examples, but will leave it at that.

    The Chained CPI for SS COLA not only assumes substitution when a product's price goes too high, it also covers 12 months of the year instead of only three. It is more accurate than the other indices that apply fixed weights of buying no matter the price...for just those three months of the year.

    Yes, I agree that the calculation of the more recent Chained CPI monthly numbers are subject to revisions (much like the unemployment numbers), but these revisions are relatively small, can go up or down, and can easily be rolled into the next year's COLA calculation if necessary.

    The bottom line is that I don't think that my welfare as a senior would be affected by the adoption of the Chained CPI. But as long as Republicans think it's the holy grail for liberals, let's use it as a bargaining chip.

    On your other point about further reductions in spending via Sequestration, yes these are really worrisome. I don't fully understand the effect of demand leakages and other factors like QE, but I am pretty sure that there are very smart people that want to make our economy falter for no other reason than to make Obama's presidency an economic failure. They will never approve a Jobs Act or any other measure that might improve the economy while President Obama is in power. The Tea Party members of government that want to STOP government, answer to their "sugar daddies" and not the American people.

    They rely on the ignorance of the American people.
  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    I just don't see the point. And you don't walk to the negotiating table already conceding this; Republicans will just demand more.

    The Social Security system makes me proud to be an American, but we can do MUCH better. And as you know I'm in favor adding to Social Security benefits, reducing red tape and penalties, and completely cutting the FICA payroll tax.

    And what you do to 'sell' the budget deficit is quote Ronald Reagan, William Niskanen, George W. Bush, & Dick Cheney, and try to say something more progressive than those people, which shouldn't be that hard, but here we sit in 2013 and those 4 arch-conservatives are more progressive on the fiscal budget than President Obama.

    "The Budget deficit is big enough to take care of itself."

    "No connection between interest rates and deficits."

    "I don't worry about numbers on pieces of paper; I worry about jobs!"

    "Reagan proved that deficits don't matter" (don't actually say this because it's misleading and wrong: "deficits do matter, but not the way most people think"-Stephanie Kelton).