Opinion: Decoding "Chained CPI" - Word Week

Photo courtesy of 401kcalculator.org.

By Matthew Cain

The words we use crucially matter to our policy debates. Framing an issue won’t change the impact of a law, but semantics can really shape the negotiation — and in some cases, determine whether a bill even passes.

For weeks, Vice President Joe Biden has been careful to talk about his campaign for “gun safety,” not “gun control.” Safety is good, control is bad. New gun regulations might not pass, but Biden’s focus on saying “gun safety” helps set the debate.

Words matter, but numbers can be almost equally important. Like words, numbers have definitions; but numbers can directly affect people’s lives.

Which brings us to today.

In Washington, DC, the fashionable idea for deficit reduction is a nifty accounting trick called “Chained CPI.” When you say it like that, it sounds like a great idea, but it’s bullshit.

Chained CPI is a new way to calculate inflation. The government calculates inflation using a measure called the Consumer Price Index. It measures the price of a basket of commonly used goods. When things like food, gas and clothing get more expensive, the CPI rises.

Right now, social security benefits, tax brackets and everything else the government adjusts for inflation is calculated using CPI-W — the basket of goods most often used by workers in metropolitan area.

The “accounting trick” is switching to a different inflation measure that proponents of this system insist is more accurate because it assumes consumers substitute cheaper products when things they like get too expensive. Switching to inexpensive chicken when beef gets too pricey, as the classic example goes, means that the average price of goods in the basket grows more slowly. Slower price growth means slower growth in everything the government adjusts for inflation, including Social Security.

Let’s not mince words: Chained CPI isn’t an accounting trick; it’s a benefit cut.

Over the past few years, Chained CPI has grown about 0.25 to 0.35 percentage points slower than the unchained version. The cuts compound each year, cutting more and more from retirees as their medical costs rise. For a 92-year-old retiree, it would be like losing a full month of benefits, according to the AARP.

Social Security already underestimates retirees’ costs. CPI-W is based on what workers buy, but retirees spend much more of their incomes on things like healthcare and housing, which have historically grown faster than everything else.

The Social Security Administration has an experimental index called CPI-E, which tracks the sorts of things that the elderly are more likely to buy. Since they started calculating the CPI-E, it has grown faster than the other measures of inflation. In 2003, the New York Federal Reserve did a study and concluded that the elderly were getting hosed:

We argue that increases in benefits resulting from CPI-E indexation would in fact be significant. This assertion is based on our calculation of what average OASI benefits would be today if the index had been adopted in 1984, our first year of data. We find that overall, benefits in 2001 would have been 3.84 percent higher. This percentage corresponds to an average monthly benefit of $912, as opposed to the current $878, which sums to $408 annually per beneficiary. Thus, assuming that the CPI-E reasonably represents the spending patterns of the elderly, seniors have experienced a nontrivial drop in their spending power since 1984.

Let’s repeat that last part. “Seniors have experienced a nontrivial drop in their spending power since 1984.” The NY Fed report was written a decade ago. Seniors’ spending power has only fallen since. Today, the average Social Security benefit is only $13,000 a year.

As Social Security benefits have fallen, seniors’ private retirement savings have taken a hit, too. Guaranteed benefit pensions are all but extinct, and the Great Recession decimated the private investments that were supposed to replace them.

The news isn’t any better for the next generation of seniors, either. The housing bubble and economic collapse has left millions of American mortgagees owing more on their mortgage than their homes are worth, wiping out most retirees’ biggest income source. While the stock market may have recovered by the time the Baby Boomers are ready to retire, they likely won’t be in any better shape than their parents. As The Atlantic reported recently:

A study by the National Bureau of Economic Research found that more than one-quarter of baby boomer households thought “hardly at all” about retirement and that financial literacy among boomers was “alarmingly low.” Half could not do a simple math calculation (divide $2 million by five) and fewer than 20 percent could calculate compound interest.

It’s not a pretty picture. Seniors — and those who are about to become seniors — need more help than we’re giving them. Cutting Social Security is a step in the wrong direction.

And yet, the people pushing the hardest to squeeze even more pennies out of our grandparents say that they have Social Security’s best interests at heart. This, my friends, is what we call a lie.

It’s true that Social Security will start to face some financial troubles in a few decades. (The urgency to fix a problem that is anywhere between twenty and seventy-five years from fruition is a bit perplexing.) But there’s an easy fix: eliminate the regressive payroll tax cap.

Social Security taxes only apply to the first $113,700 of income, so the nation’s very wealthiest — the only group who have seen their incomes rise over the last decade — pay a lower percentage of their incomes to Social Security. (Never mind that their incomes often come from investments instead of wages, which aren’t subject to payroll taxes anyway.) Nobody’s saying the rich should contribute more to Social Security than the rest of us, but at least they shouldn’t pay less.

Meanwhile, this push to slash Social Security seems to have come out of nowhere. If the recent election proved anything, it was that Americans don’t want to cut seniors’ benefits — even Paul Ryan claimed that his plans wouldn’t cut any benefits from anyone over the age of 55. And polls show that Social Security remains incredibly popular. Nearly nine out of ten respondents in a recent poll say that Social Security benefits are “more important than ever,” and huge majorities want to see benefits raised, not cut.

Nevertheless, buoyed by all-powerful conventional wisdom, the pressure to slice off the top of Social Security grows stronger and stronger. The White House reiterated its support this week, and Congressional leaders seem ready to follow along. If there’s a deal to avoid the sequester, it will probably include Chained CPI.

Those of us who only have the power of our words often feel like we’re screaming into the wind. No matter how many times we make the case that these cuts are immoral, unnecessary and unpopular, elected officials push ahead.

But some members of Congress are finally standing up. Twenty Representatives, including three from New York City, have signed onto a letter, promising a vote against benefit cuts, including Chained CPI.

Yes, twenty is a small number in Congress, but there’s reason to believe their plan could work. These representatives haven’t promised just words; they’ve promised their votes.

And actions speak louder than words.