More at Stake With the Chained CPI Than Social Security Benefits

January 25, 2013

As perhaps you know, the President’s last comprehensive “fiscal cliff” proposal included the adoption of a new inflation measure — the Chained Consumer Price Index.

We’ve heard about it before, but almost exclusively as a way to curb spending on Social Security retirement benefits. And that’s what we’re hearing most about now.

But what the President proposed was apparently a global switch to the chained CPI, with some unspecified protections for “the most vulnerable.”

Just because Congress decided to punt on the “fiscal cliff” doesn’t mean something of this sort won’t resurface.

In fact, it already has in a bill co-sponsored by Tennessee’s Republican Senators Bob Corker and Lamar Alexander.

Like the President’s offer, the Corker-Alexander bill would make the chained CPI the inflation measure used for all federal cost-of-living adjustments.

So it would raise more tax revenues, with the highest percent increases coming from fairly low-income households.

It would also make relatively fewer people eligible for a host of safety net programs and, in some cases, reduce the benefits those still eligible would get, relative to what they could expect if there were no CPI switch.

The same result, of course, for Social Security retirement benefits.

I’ll deal here with the eligibility issue and return to benefit cuts in a separate post. But first, a super-simple primer to set the context.

Chained CPI 101

At this point, the federal government uses the Consumer Price Index for All Urban Consumers (CPI-U) to make what are basically cost-of-living adjustments in both the tax code and the Census Bureau’s poverty thresholds.

A somewhat different index — the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) — is used to adjust all major federal retirement benefits, including Social Security, and Social Security disability benefits as well.

Both these indexes reflect the prices consumers pay for a set market basket of goods and services. When the average costs of the total go up, so do  the CPIs.

But, say economists, consumers change their purchasing practices when the costs of certain items rise. For example, if the price of beef goes up, they buy less of it and more chicken.

The chained CPI is designed to capture these changes. So the cost-of-living increases it produces are lower than those based on a a market basket that isn’t continuously re-weighted to reflect substitutions.

Eligibility for Safety Net Benefits

More than 30 federal anti-poverty programs based their income cut-offs or targeting on the federal poverty guidelines,* as do some state and local programs.

The federal programs include many we think of as key parts of the safety net, e.g., the food stamp program, other nutrition assistance programs, the Children’s Health Insurance Program, LIHEAP (the Low Income Home Energy Assistance Program).

The poverty guidelines are simplified versions of the Census Bureau’s official poverty thresholds. These, as I’ve said, are annually adjusted using the CPI-U.

The chained CPI would thus mean smaller upward adjustments in the income cut-offs — not much smaller in any given year, but cumulative over time.

Bad Policymaking

I see at least three problems with the result I’ve just described.

First, the thresholds already significantly understate the number of poor people in this country, as even the Census Bureau’s still-evolving Supplemental Poverty Measure shows.

This is partly because the thresholds are based on an outdated minimum cost-of-living measure — three times the cost of what used to be the U.S. Department of Agriculture’s cheapest food plan.

The annual adjustments compound the problem because the CPI-U understates living-cost increases for households in the bottom fifth of the income scale — or so the research we have suggests.

Use of the chained CPI would thus, as Shawn Fremstad at the Center for Economic and Policy Research says, define deprivation downward, even more than use of the current thresholds do.

At the same time, the living-cost research tells us that the chained CPI probably isn’t more accurate for low-income households — quite the opposite, in fact.

So using it would unjustly exclude even more people from the safety net — assuming the proper measure is insufficient income to pay for basic living needs. And if not that, what?

Finally, the proposed switch to the chained CPI is an underhanded way to make consequential policy changes. And that, as Wonkblogger Dylan Matthews says, is what makes it so attractive.

If our policymakers want to shrink the safety net, then they should say so forthrightly, name the programs and give us the figures — not trot out a supposedly technical change that only the most wonkish among us can understand.

* The official list of programs that use the federal poverty guidelines says that the Temporary Assistance for Needy Families Program doesn’t. This is because states can set income eligibility standards for TANF however they choose. Fourteen expressly use the federal poverty level, which I assume means the guidelines.


A Second Look At Flat-Lined Social Security Benefits For Seniors

November 11, 2010

Before I decided to publicly reject the administration’s proposed $250 Social Security gift, I thought about potential cost-of-living increases that could disproportionately affect retirees. Turns out I gave up too soon.

I knew all too well that Medicare premiums deducted from Social Security retirement benefits can, over time, erode their value because health care costs are rising faster than the overall inflation rate.

But I read that nearly 90% of beneficiaries would be protected from a bigger premium bite next year. Of these, 70% are covered by a “hold harmless” provision, which says that beneficiaries already paying Part B premiums won’t get tapped for increases that would reduce their net benefits, unless they earn enough to subject them to income-adjusted premiums. The remaining 20% because state medical assistance agencies will pay the premiums.

What I’ve since learned is that there’s no “hold harmless” provision for Medicare Parts C and D — the optional alternative coverage offered by private insurance companies and the also-optional insurance coverage for prescription drugs. So some portion of that 70% may have less for other living expenses.

More importantly, I’ve found compelling evidence that the cost-of-living index used to determine the need for benefits adjustments — the Consumer Price Index for Urban Wage Earners and Clerical Workers — doesn’t accurately account for seniors’ rising living costs.

Higher health care costs are a major factor here. Others include higher housing costs and, to a lesser extent, fuel oil costs. We know this because the Bureau of Labor Statistics has been maintaining an “experimental” Consumer Price Index for Elderly Americans since 1982.

It’s found that, over a 25-year period, the CPI-E has risen somewhat faster than the CPI-W used to calculate benefits. The long-term differences translate into an average 3% difference a year. The difference doesn’t matter much in the first year, but it mounts up over time.

For example, according to a recent report by the Senior Citizen’s League, someone who received $816 in 2000 would have received $216 less in 2009 than what the CPI-E indicates would have been enough to maintain a steady state.

Now the CPI-E is only suggestive. As BLS explains, the sample used to construct it is small. And it’s not an altogether accurate reflection of either the demographics of Social Security retirement beneficiaries or their living costs.

It nevertheless suggests that cost-of-living adjustments in retirement benefits ought to be based on a more suitable index.

Congressman John Duncan, Jr. (D-TN) has introduced a bill — the CPI for Seniors Act — that would direct BLS to develop and publish a monthly index of changes in consumption expenditures that are typical for people aged 62 and older.

It’s got five cosponsors and probably not going anywhere fast. Because once you’ve got the index, you’ve got solid grounds for bigger annual increases — thus greater stress on the Social Security Trust Fund we’re supposed to be so worried about.

And you’d still need another index to account for Medicare and other expenditures that are singular or different for the over-full retirement age population.

None of this, to my mind, argues for the proposed $250 across-the-board consolation prize for no cost-of-living increase next year. Nor against my view that the $250 would be better spent as assistance to struggling TANF families.

But it does say that I shouldn’t have been so quick to dismiss the complaints about the unfairness of another year without a COLA.

Keep Your $250 Gift To Retirees … Or Send It Where It’s More Needed

October 25, 2010

I don’t usually find myself agreeing with the Washington Post editorial board these days. But setting aside the nasty “pandering” slant, I share its view that the White House and Congress should shelve the plan to send Social Security recipients another $250 to compensate for the lack of a cost-of-living adjustment next year.

At least, I concur so far as payments to seniors are concerned. Benefits to other affected groups may be a different story. I’m more comfortable speaking only as one of the 41 million or so who receive benefits because we’ve reached the official retirement age.

Would I like an extra $250? Sure, even though I’d have to pay part of it back in income taxes. Am I disappointed that my monthly benefits won’t be higher next year? Of course. But do I, like some of the recipients who’ve reacted, feel that level payments will be unfair? Absolutely not.

Like other recipients, I’ve already benefited from a protection in the COLA system. Benefits go up when the Consumer Price Index for Urban Wage Earners and Clerical Workers rises, but they can’t go down when it drops.

In 2009, benefits reflected a sharp 5.8% rise in the CPI-W the year before. They stayed level in 2010 when the CPI-W dropped by 2.1%. And as the Center on Budget and Policy Priorities explains, I and all my fellow beneficiaries will still be ahead of the game next year.

This isn’t to say that many recipients of Social Security retirement benefits won’t feel strapped. CBPP reports that the average benefit in June 2010 was $14,000.

More than half of the recipients rely on the benefits for the majority of their cash income. For about a quarter, it provides more than 90%. Dependence increases with age, as income from work becomes less likely and savings get used up.

If you’re trying to make do on $14,000 — or less if you were a low-wage worker — even $250 can make a real difference. But the proposed extra cash would go to all recipients, even the wealthiest.

The White House argues that seniors have seen their savings fall as a result of the recession. Undoubtedly true, as my monthly statements can attest. But we’re likely to have taken less of a hit than younger people — assuming we followed the standard advice to shift toward lower-risk investments as we aged.

In any event, a recent survey by the Pew Research Center found that 70% of us have held our own during the recession — a much higher percentage than for any other age group. This, I suspect, is a combination of investment strategy and, perhaps more importantly, Social Security itself.

Now maybe there’d be nothing wrong with a modest gift from the fed if everyone else had enough to get along on. As things stand, the poverty rate for seniors dropped a bit last year — down to a record low 8.9%. The child poverty rate was more than twice as high — 20.7%. For single-woman families with children, it was a shocking 38.5%.

Which brings me to my last point. While Social Security benefits keep about 90% of seniors out of poverty, a new CBPP analysis shows that TANF cash benefits to parents and children aren’t enough to lift the families out of deep poverty, i.e., above 50% of the federal poverty level, in any state in the country.

Even combined with food stamps, they’re not enough to get families to 75% of the FPL in 41 states and the District of Columbia. (For the District, the maximum TANF cash benefit for a family of three is 28% of the FPL. With food stamps, the family gets to 59% of the FPL.)

Not only that. In all but three states, the benefits are lower in inflation-adjusted dollars than they were when TANF was created in 1996. They’ve lost at least 20% of their value in 29 states and the District, where the loss has been 25.8%. No COLAs here.

In all but one or maybe two states, a TANF family of three was getting less than half the average Social Security retirement benefit in July 2010. What will happen unless Congress renews the now-expired TANF Emergency Contingency Fund is an open question since a majority of states have used a portion of their allocation for basic cash assistance.

So if the White House and the Democratic leadership in Congress want to send $250 checks where they’re needed most, I suggest they send them to TANF families.

“Welfare mothers” aren’t as politically popular — or as likely to vote — as seniors. But they’re raising a generation of desperately poor children, who are at high risk of lifelong poverty — and ultimately dependence on Social Security checks that won’t be big enough to lift them out.