News Article "Viewpoint: ‘Chained’ CPI for Social Security Calculations Robs Retirees"

Viewpoint: ‘Chained’ CPI for Social Security Calculations Robs Retirees

Financially speaking, we keep asking more of retirees. First, we ask folks who have saved for a lifetime to live on less while banks and indebted consumers use low interest rates to heal. Then we ask them to endure another whack at Social Security benefits while the government tries to rein in spending.
This isn’t especially new. We’re half a decade into historically low rates, which have made it all but impossible for many retirees to secure a livable income stream through traditional vehicles like bonds, bank CDs, and fixed annuities. But that’s kind of the point: A lot of seniors have sold assets to make ends meet. After five years, they are running out of things to sell.
Instead of relief, they get a bloody nose. Last month, the White House budget proposed tweaks to the cost-of-living formula used to determine annual Social Security benefits increases. Rest assured: This tweak would not make benefits more generous.
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The President wants to use a “chained” consumer-price index, which accounts for how most people actually live. When beef prices go up, for example, many people buy cheaper chicken instead — so they don’t actually feel the full cost of the rising beef. Currently the CPI is running at 1.5%; chained CPI at 1.4%.
The problem is that while such a small difference may sound meaningless in the short term, when benefits increases are held back like this year after year, it has a reverse compounding effect. After 10 years, the average Social Security benefit would be about 3% less; after 30 years it would be 8.4% less. Instead of receiving, say, $20,000 a year, you’d be getting $18,320.
If that still doesn’t sound so bad, consider that even the current more generous CPI formula may systematically understate the inflation rate for seniors. The reason is that cheaper substitutes for many of their expenditures simply are not available, especially in the areas of healthcare and housing, which are big parts of a typical senior’s budget. So a realistic chained CPI for seniors arguably would increase benefits, not decrease them. The Department of Labor has been testing an alternate chained CPI for elders. Using its data, the AARP Public Policy Institute found that the accumulated benefit using the alternative version would average $4,052 higher after 10 years and $34,047 higher after 30 years.
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The proposed chained CPI faces plenty opposition. So it may never come to pass, which would be welcome news to retirees who collectively derive 70% of their income from Social Security. Somehow, Social Security must be fixed and the budget must be trimmed. But if we’re going to further strip retirees’ reliable income sources let’s at least be honest about how we do it.


Read more: http://business.time.com/2013/05/14/how-chained-cpi-for-social-security-calculations-robs-retirees/#ixzz2UkHqD37u