CHARLESTON, W.Va. -- To cut the federal deficit, several Congressional leaders, as well as the White House, are talking about the possibility of modifying how Social Security benefits are calculated.Social Security's annual cost-of-living adjustment (COLA) is currently calculated using the Consumer Price Index (CPI) released annually by the United States Bureau of Labor Statistics.Last year, consumer prices rose two percent, according to the annual CPI. Social Security benefits rose by the same level.Today, some want to use the Chained CPI, an alternative inflation measure the BLS began releasing in 2002. That would reduce Social Security increases.
The Chained CPI finds smaller increases in consumer prices than the traditional CPI, by estimating how consumers supposedly change their buying habits as prices change.If apple prices rise and banana prices drop, for example, consumers would tend to buy fewer apples and more bananas, according to Chained CPI theories.A recent Center for Economic and Policy Research paper stated: "The Chained CPI is relatively new and has only been calculated by the BLS since 2002. It has shown a rate of inflation 0.3 percent lower than the current index used to calculate Social Security's annual cost-of-living adjustment."Over time, changing to the Chained CPI would result in significant cuts to Social Security benefits: a cut of roughly three percent after 10 years, about six percent after 20 years, and close to nine percent after 30 years.""For the average worker retiring at age 65," the CEPR study stated, "this would mean a cut of about $650 each year by age 75 and a cut of roughly $1,130 each year at age 85. These reductions in benefits would be a substantial hardship."Poor and low-income retired Americans would lose much bigger proportions of their incomes than wealthy retirees.The American Association of Retired Persons (AARP) is helping lead a fight against the proposed changes, which "would cut benefits most for the oldest Americans -- those who are least able to afford it."Major increases in health-care costs, which are much higher than overall CPI increases, have bigger impacts on older Americans.AARP recently argued the Chained CPI "theory falls short since many seniors and veterans spend much of their money on basic goods like prescription drugs, utilities and health care -- items that don't have lower-cost substitutes."
According to a recent fact sheet from AARP's Public Policy Institute, using the Chained CPI would have significant negative effects over time:• The greatest impact would be on the oldest Americans. In the future, "the Chained CPI would cut one full month's income from a 92-year-old beneficiary's annual Social Security benefits. That's because the impact of the chained CPI on benefits increases significantly over time."
• "The oldest can least afford a COLA cut." Americans in their 80s and 90s typically have less income and financial assets than younger Americans.• "The poorest are hit the hardest," because poor older people "tend to rely on Social Security for all or most of their income."• "Women lose more than men." Women tend to live longer than men, have lower incomes and are more dependent on Social Security.During an interview with the Sunday Gazette-Mail last week, West Virginia AARP Director Gaylene A. Miller questioned why the "chained CPI is even being considered as part of a budget deal. We are not line items. We are people. This impacts real people."Tom Hunter, a West Virginia AARP spokesman, believes Social Security checks are becoming even more important, as many employer-funded pension benefits decline.
In recent years, many private employers stopped offering pension benefits. Some companies and existing pension funds are going bankrupt, such as the United Mine Workers pensions for miners working for Patriot Coal, most of whom worked for Arch Coal or Peabody Coal previously.
Hunter said, "Social Security was never meant to be a sole source of income. But today's pensions benefits have gone away for many people. West Virginians need to be aware of what is happening."Today's CPI, before any proposed changes, Miller said, already "underestimates the goods and services that people 65 and over need. A Chained CPI would further erode that calculation."During the 2012 election campaigns and debates, Miller said, "almost every candidate said he or she would protect Social Security. Let's make them stick to their promises."President Obama has allowed Chained CPI proposals to become part of ongoing discussions about how to reduce the federal deficit.Earlier this month, Erskine Bowles, a White House chief-of-staff under Democrat Bill Clinton, and former Sen. Alan Simpson, R-Wyo., urged Congress to "adopt Chained CPI" to achieve savings.In February 2010, Obama named Bowles and Simpson to head a commission to make proposals to cut federal spending.A recent AARP Public Policy Institute Fact Sheet focusing on West Virginia detailed Social Security's local impacts:• Ninety-two percent of West Virginians 65 or older -- 277,734 people -- receive Social Security benefits. Their average annual benefit was $13,500.• Social Security makes up 70 percent of the annual income for a typical older West Virginian and 77 percent of annual incomes for low- and middle-income seniors.In addition to providing individual benefits, Social Security plays a major role boosting the state's economy. In 2011, Social Security sent $5.7 billion in benefits to West Virginians.Ted Boettner, executive director of the West Virginia Center on Budget & Policy, said, "If your goal is to accurately calculate the cost-of-living of seniors, going to Chained CPI is the wrong way to go. It will drastically underestimate inflation for seniors who spend a larger share of their income on health care, which has generally risen more rapidly in price than other items."The Chained CPI will greatly impact West Virginia, where one in four seniors rely on Social Security as their only source of income."It would be much better if government could produce a full 'Elderly CPI' so we would actually know the inflation experienced by the elderly," Boettner said.Chained CPI cuts, Hunter said, would have major impacts on military veterans and be particularly harmful to injured veterans returning from Iraq and Afghanistan.A 30-year-old veteran with severe disabilities would see his annual Social Security benefits drop by $1,425 a year when he reaches 45 and by $3,231 when he becomes 65, under Chained CPI calculations.If approved, the Chained CPI proposal would cost West Virginia veterans more than $103 million during the next 10 years and more than $17 billion to all veterans nationally, according to AARP.Boettner also pointed out that federal law specifically states Social Security is a separate and independent government program that should not be used in any budget calculations."Social Security does not add to the deficit. Why this is on the chopping block to reduce short-term deficits is mystifying."This is especially important today, since employer pensions and individual savings have largely collapsed over the last decade and defined benefit pensions are rapidly disappearing."Today, only half of West Virginians have a defined contribution plan, like an IRA or 401(k) and the workers who do have these plans have only limited amounts of money in them," Boettner said. Reach Paul J. Nyden at email@example.com or 304-348-5164.