COLA Crisis – Deficit Reduction Negotiators Considering A New & Disadvantageous Method For Calculating COLAs

Ever since I have been putting up my monthly ‘2012 COLA Watch’ posts, I have warned that the politicians in Washington might do something to prevent us from getting the full COLA in January 2012 that the current law says we deserve. For example, last month, I included the following:

But. given the putative “crisis” situation in Washington, I cannot say for sure whether any COLA will survive in the political battles to come. Each 1% of COLA costs about $7 billion each year forever. I do not trust President Obama and Congress not to discard COLAs altogether as a deficit reduction measure (which isn’t appropriate, since Social Security benefits do not add to the deficit.) However, I do not think this is likely, given the whupping the Republicans have taken for the Paul Ryan budget, which eliminates Medicare as we know it for everyone age 54 and younger.

However, it does appear that one of the items that may make it through the deficit reduction negotiations is a change in the method by which COLAs are computed, a change which will be disadvantageous to everyone receiving Social Security benefits, now or in the future, along with other Federal benefits.

According to one of the sources, this change alone would “save” the government about $220 billion over 10 years. That is an average of $22 billion each year. And it wouldn’t “save” anything. This is yet another variation in Big Lie #1.  The money paid to Social Security beneficiaries in a year comes mostly from the FICA taxes collected from workers and their employers that same year. Any shortfall is covered from the trust funds which are already part of the national debt!
This $220 billion represents the ten year cost to Social Security beneficiaries, who had absolutely nothing to do with creating the national debt.

This change would have one somewhat beneficial effect, completely unrelated to the budget deficit. It would reduce, by about 1/3, the projected shortfall facing Social Security when the trust funds are finally exhausted. It is, however, a regressive method that would hurt beneficiaries directly, and by an ever-increasing degree, as time went by and the effects compounded.

The first hint of this change was in the Cat Food Commission’s final report, titled (a bit dramatically,) “The Moment Of Truth.” The Commission failed to get the required 14 votes from its members, so the final report was not officially presented to Congress, but I always figured that any Senator or Representative who wanted a copy could do what I did and just download it.

The Moment Of Truth

December 2010

RECOMMENDATION 5.7: ADOPT IMPROVED MEASURE OF CPI. Use the chained CPI, a more accurate measure of inflation, to calculate the Cost of Living Adjustment for Social Security beneficiaries.

As with the rest of the mandatory budget and the tax code, we recommend relying on the “chained CPI” to calculate the Cost of Living Adjustment (COLA) in Social Security, rather than the standard CPI. The Bureau of Labor Statistics has stated that the chained CPI is designed to more closely approximate a cost-of-living index than the standard CPI, and experts on both sides of the aisle have supported this technical improvement to the index.

You can download a .pdf of their entire report at The Moment of Truth. Section V., which pertains to Social Security and their recommendations for changes to it, including the one quoted above, covers pages 49 through 54.

What Is the Chained-CPI-U Anyway?

The Chained CPI-U, or C-CPI-U, for short is a relatively new method for determining CPI. The BLS began producing C-CPI-U figures in 2002. This index applies to the same target population as the CPI-U, all urban dwellers, about 87% of the population. The same raw data are used, but a different formula is employed to calculate average prices.

The chained CPI was developed to overcome a perceived shortcoming of the CPI-U and CPI-W, which was felt caused them to overstate inflation. Based on all evidence I’ve seen, and everyone I’ve talked to about this has seen, neither the CPI-U nor the CPI-W comes anywhere close to what inflation really is out here in the real world.  But the alleged statisticians who maintain these indices say that they do not account for the changes that people make in the composition of goods that they purchase over time, often in response to price changes. The C-CPI-U is intended to capture consumers’ behavior as they respond to relative price changes, referred to as the “substitution effect.”

There are two levels of substitution effects, low-level and high-level. Low-level substitutions are those substitutions which occur within the same group (essentially identical items.) A couple of examples of low-level substitutions: At my local supermarket, a 6 ounce can of Hunt’s Tomato Paste costs $1.09. Their house brand, same size, costs $0.60. An 18 ounce box of Kellogg’s Corn Flakes costs $4.69. Their house brand, same size, costs $3.29. When a name brand increases the price of its product, the consumer shifts to a non-name brand with a lower price, which the C-CPI-U interprets as no inflation. The current CPI-U and CPI-W also catch this but less accurately. High-level substitutions occur between two different groups. An example of high-level substitution would occur when, say, beef prices rise and pork prices fall, so consumers buy less beef and more pork. The current indices do not capture this at all. Falling within high-level substitutions are consumer reactions to higher gasoline prices. They drive less and buy less gasoline. The current indices do not capture this either.

From 2000 through early 2011, the chained CPI has, on average, been 0.25 to 0.3 percentage points lower per year than the standard CPI measures. Though this difference is small on average, it compounds over time; depending on which index you use, prices have either increased by 30 percent (CPI-U and CPI-W) or 26 percent (chained CPI) since 2000. Over a longer time frame, this difference would become even more pronounced.

It’s also quite pronounced in the year from May 2010 through May 2011 and the month from April 2011 through May 2011.

May 2011 Index April 2011 Index Increase May 2011 Over Apr 2011 Increase May 2011 Over May 2010
CPI-W 222.954 221.743 0.5% 4.1%
Chained CPI-U 129.947 129.416 0.4% 3.3%

Source: The current BLS CPI Report, released June 15, 2011. Data comes from Table 4 and Table 7.

Ten days ago we got the first inkling that the budget deficit negotiators were actually considering this change.

Alliance for retired Americans Friday Alert, June 24, 2011

“Social Security Beneficiaries Would Suffer From Readjusted CPI, Report Says”

As the debate over how to cure America’s budget woes grows more contentious in Congress, proposals that would directly threaten Social Security beneficiaries continue to be considered on Capitol Hill. One such proposal recommends reducing Social Security’s Cost of Living Adjustment (COLA) by reworking the Consumer Price Index for All Urban Workers (CPI-U) based on a chain-weighted formula. This ‘chained’ formula is designed to reflect changes in consumption patterns of a broad range of goods and services per month. Simply put, a ‘chained’ CPI is an aggressive, compounded cut to Social Security benefits that the chief actuary predicts will decrease benefits for the average recipient by $1,400 over a 30-year span. A troubling statistic given that 74% of all beneficiaries over the age of 80 rely on Social Security for more than half of their income. “While some choose to hide behind the policy-speak of calling it a ‘Chained-CPI,’ the cold reality is that it would be an immediate cut in Social Security benefits,” said Edward F. Coyle, Executive Director of the Alliance. Coyle continued, “The Chief Actuary’s report is a reminder that with so many seniors already struggling to get by, this would be devastating for retirees all across the country. Though the proposal is nowhere near close to being finalized, it does ignore the simple fact that Social Security has not contributed one cent to America’s deficit.”

Source: Social Security Beneficiaries Would Suffer From Readjusted CPI, Report Says.

Last Friday, July 1, 2011, the site NASDAQ.com ran an article entitled “Change To Inflation Measurement On Table As Part Of Budget Talks – Aides.”

WASHINGTON -(Dow Jones)- Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks.

Notice they don’t say that this move would do anything about about deficit reduction. It just “represent(s) significant progress” in the “talks.” It also represents Democratic Party caving in

According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.

Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.

The proposal could lower federal spending by around $220 billion over the next decade, based on calculations by last year’s White House deficit commission, which recommended the change as part of its final report.

According to two congressional aides familiar with the budget negotiations, the shift is being “seriously discussed” as part of the ongoing talks to strike a budget deal, that would be used to ease the passage of a required increase in the country’s debt limit.

Please refer to the entire article, “Change To Inflation Measurement On Table As Part Of Budget Talks – Aides.”

This is the first attempt by Republicans to reduce Social Security benefits for the express purpose of reducing the budget deficit. I am thoroughly disgusted with this repeated Big Lie and the apparent acquiescence from the Democrats. Once again the Congress and the President plan to make the middle class, the workers, the poor, the disabled and the elderly pay for all the tax breaks and outright giveaways to the rich. The millionaires and billionaires, and the big corporations, get away with murder, and the politicians they bought and paid for, and now outright own, including President Obama, including Justices Alito, Scalia, Roberts, and Thomas, guarantee that the rest of us will never be treated fairly. The solution is obvious. Tax the rich. Put the top marginal tax rate back to a rational level, perhaps 50%, where it was throughout most of Reagan’s Presidency, and eliminate the loopholes the rich use to avoid paying their fair share of taxes. Tax corporations on excessive profits and money squeezed out of working Americans by outsourcing their jobs overseas. There are many other proposals for fixing the tax problem, but Republicans would rather cut out their own kidneys with a pocket knife than increase the amounts the millionaire, billionaires, and corporations pay. As I said, they are bought and paid for, the wholly owned subsidiaries of people like the Koch Brothers and Grover Norquist.

Call President Obama, your Representative and Senators, and the leadership of both parties in both houses. Let them know what you think, loudly and firmly.

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9 Responses to COLA Crisis – Deficit Reduction Negotiators Considering A New & Disadvantageous Method For Calculating COLAs

  1. Bob says:

    Thanks for your continuing work in keeping us informed on this very important issue. Your analysis is spot on every time!

  2. epicfail2011 says:

    I can’t believe this ! Although I, like you, saw it coming. Why don’t they just call it what it is (please recognize the abbreviation BS as what I’m referring to). This proposed ‘new, more accurate’ index should be called the ‘CPI – BS’ index.

    Come on ! No inflation, my a$$ ! (I’m disabled by the way). Just as ONE example, the one-pound package of bacon that used to cost $4 is now $8 or $9, and that’s just in 4 years. I can’t afford that !Are Congressmembers (who vote themselves a raise each year and then go on one of their MANY annual vacations) trying to ‘starve out’ seniors and disabled people ?? It sure seems that way . . .

    My rent goes up a bit EVERY year. These past two years with no COLA have been difficult, to say the least. I have this one VERY intuitive friend. She and I have only just recently remet. I met her 28 years ago. She didn’t even have to look in my pantry to realize that I am not able to afford enough nutritious food. I try my best. Food banks, etc. But no, ramen noodles don’t exactly make for a healthy diet. I weigh less than her – and she’s only 135 pounds. We’re both 46 years old, btw.

    • ssapotluck says:

      I agree. I wrote one post on this topic already — the inadequacy of the CPI-W to measure inflation accurately. Please see How Well Does The CPI-W Measure The Average Consumers Inflation.. I plan to revisit this topic soon.

      By the way, the 27th Amendment to the Constitution, which was ratified on May 7, 1992, reads, “No law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of representatives shall have intervened.” In other words, if Congress votes itself a raise, it doesn’t take affect until the next Congress. They don’t vote themselves raises very often.

      This amendment was originally proposed on September 25, 1789. Yes, 1789. By the 1st Congress. It took almost 203 years for two thirds of the states to ratify it.

  3. epicfail2011 says:

    Thanks for the referral to that page. I find your writings to be factual and your use of charts gives me a clear ‘visual’ of what’s going on with the topics you cover. I know other low-income people. ALL of us are aware of the decrease in the purchasing power of our dollars. ALL of us. . .

    I personally dislike this notion of how they are saying that low-income consumers will choose a substitute if a brand name product goes up in price. Of course we will. We’re nearly being FORCED to. And somehow that means there’s no inflation ??? That academic manipulation of the formula just ‘circles around’ the issue. Does being disabled mean that I have to eat lower quality foods ? Because that’s what those ‘substitutes’ generally are. It doesn’t do me any good to buy substitutes. I don’t ‘save’ any money if I end up tossing the food because it is of only fair quality. I’ve tried that method before. It’s more of a waste than a savings. . .

    • ssapotluck says:

      I understand fully. We make the same substitutions in our household. As time goes by, even the cheaper, store brand items increase in cost. Remember the famous Disraeli quote, “There are lies, damned lies, and statistics.”

    • SalG says:

      All these lower quality foods are usually higher in salt and substitutes to enhance the taste. Look at Philly cream cheese versus the store brand. Also take a look at potassium content in foods. People who need to regulate K intake / or take K could have problems.

  4. johnmanousso says:

    I am mad with the politicians in Washington. They can give a big raise among themselves, but disregard the seniors. Shame on them.

    I hope they will never be re-elected again.

    • revenuer says:

      You and me both. Unfortunately, we will still have to do some choosing between the lesser of two evils or we well have a teabagger president just waiting to rip our lives apart even more than they already have been. Good luck to you, and please choose well when you give your support or vote.

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