Most analysts believe that switching to a more – stingy measure of inflation to determine annual cost-of-living adjustments (COLAs) will form a key provision to larger government-wide deficit reduction legislation. The idea received the blessing of President Obama who offered the change last December during fiscal cliff negotiations and continues to float the idea as Congress works on the government's fiscal year 2014 legislation.
The Congressional Budget Office (CBO) and the Joint Committee on Taxation have boosted previous estimates and now say that switching to the chained consumer price index (C-CPI) will cut Social Security and other federal retirement benefits by $198 billion and increase taxes by $142 billion over the next 10 years. The loss to beneficiaries would compound over time and grows deeper each year as illustrated in the following chart. As seniors grow older and more likely to develop costly health conditions, their Social Security benefits would become less adequate to cover rising costs more quickly.
Chained COLA Cut — How Much Would You Lose?
|Year||Monthly Benefit||Monthly Benefit||Monthly Difference||Annual Difference|
|Total over ten years||$2,023.90|
Supporters of the move claim the chained CPI is "more accurate" because the current inflation measures don’t take into account how consumers substitute lower costing items when prices increase. When beef goes up consumers might buy more chicken they argue. "But if accuracy was the real reason for making such a change to the COLA then why aren’t policy makers and Congress more interested in what seniors and disabled people really spend their money on?" asks TSCL Chairman Larry Hyland.
TSCL's annual survey of senior costs indicates that Social Security benefits have lost more than 34% of their buying power since 2000 because the current inflation measure, the Consumer Price Index for Workers (CPI-W) doesn't accurately account for the larger share of income that seniors spend on healthcare.
The fundamental fact is that two-thirds of Americans over the age of 65 depend on an average annual Social Security benefit of $14,400 for at least half of their income. Yet little consideration has been given so far to the fact that earned income in excess of $113,700 is entirely exempt for the 6.2 percent payroll tax that funds Social Security benefits. TSCL believes that by raising the maximum wage ceiling Congress could significantly reduce the financial crisis facing the system, without causing financial hardship.
How much would chaining the COLA cost you? Use TSCL’s new Chained COLA Cut Calculator to calculate your loss.
Sources: "Preliminary Estimate of the Budgetary Effects of Using the Chained CPI Starting in 2014," Congressional Budget Office, March 1, 2013.