BY MICHAEL P. BOYLE, ESQ./ Following the recent government shutdown, Congress agreed to appoint some members to a bipartisan committee in an attempt to find common ground to adopt a budget for the coming year.
One proposal we keep hearing about is adopting a “chained CPI” to replace the current method of calculating annual cost of living adjustments for Social Security recipients. SSA now uses the Consumer Price Index for Urban Wage Earners & Clerical Workers to determine annual COLA (see http://www.ssa.gov/oact/STATS/cpiw.html).
The rationale for switching to chained CPI method is that individuals change spending habits by adjusting purchases – e.g., spending less on items such as gasoline, consumer goods, or certain food items, and substituting less-expensive items. Switching to a “chained” CPI would reduce the COLA every Social Security recipient would receive in future years.
According to the Congressional Budget Office, “chained CPI may understate growth in the cost of living for some groups,” citing to evidence indicating “that the cost of living grows at a faster rate for the elderly than for younger people, in part because changes in health-care prices play a disproportionate role in older people’s cost of living.” See http://www.cbo.gov/sites/default /files/cbofiles/ attachments/ 44083_ChainedCPI.pdf.
The CBO reviewed a measure of inflation called the CPI-E, which gives greater weight to health-care costs and other goods/services seniors consume in greater numbers. The CBO found that, since 1982, inflation as measured by the CPI-E has been 0.2% higher, on average, than inflation measured by other CPI methods. This mainly reflects the fact that a larger percentage of spending by seniors is for items whose prices rise especially quickly, particularly medical care.
Switching to a chained CPI method to calculate COLA will thus adversely impact seniors, whose living costs are rising at a higher rate than their benefits.
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