The following is a brief and simplistic (but reasonably accurate) explanation of different inflation indices, their effects, and reason why CalRTA opposes changing the current Social Security annual cost-of-living calculation process.
Consumer Price Index (CPI) Issues
Usual CPI is a fixed set of goods and services as a percentage of the index, for example buying beef for meat. Each year the Bureau of Labor Statistics (BLS) calculates how much it costs to buy the same fixed set of goods and services. The change between years is the rate of inflation measured by the CPI.
Chained CPI assumes people will substitute (not buy) higher cost parts of the CPI and instead will buy something of less cost or lesser quality. An example is if the cost of beef increases faster than the cost of chicken, people will start buying chicken instead of beef. In this case, if buying beef were 2% of the CPI, then instead of using beef costs for that 2% the BLS would use chicken costs to calculate the CPI.
If lower cost items are always substituted for the items in the regular CPI, the effect is a lower growth in the chained CPI. The chained CPI should always show lower inflation rates than reality as shown in a fixed market basket CPI. Every year the chained CPI is, on average, about 0.3 percent lower than the standard CPI. This means if the chained CPI is adopted, on average seniors will lose to inflation 3% of the retirement benefit value after 10 years; 6% after 20 years; and 9% after 30 years.
Senior Consumer Price Index
The BLS calculated a separate Senior CPI during a 10-year period. That Senior CPI used a fixed set of goods and services purchased by seniors. It was weighted more to health care and similar senior costs than the regular CPI.
The Senior CPI was on average about 0.3% higher than the standard CPI. This means that after 10 years, it was 3% higher, after 20 years it would be 6% higher, and after 30 years it would be 9% higher, assuming health care costs did not continue to escalate.
Fiscal Cliff Proposal
The Commission for Fiscal Responsibility and Reform co-chairs recommended changing the Social Security COLA from wage-based inflation, to a calculation measured by a chained CPI. This recommendation is part of President Obama’s and Speaker Boehner’s negotiations regarding avoiding the fiscal cliff.
Chained CPI Compared to Senior CPI
The Regular CPI is about 0.3% lower than the Senior CPI per year.
The chained CPI is also another 0.3% lower per year.
In combination the proposal to move to the chained CPI means a COLA that could be, on average, 0.6% per year lower than the Senior CPI.
This could mean Social Security recipients will experience a purchasing power loss of 6% in 10 years, 12% in 20 years; and 18% in 30 years.
Adopting a chained CPI is a Social Security benefit cut of up to 12% after 20 years in retirement – the approximate life expectancy after retirement at age 65.