Cutting social security by stealth

http://www.guardian.co.uk/commentisfree/cifamerica/2011/jul/25/social-security-stealth-cuts-ccpi

Dean Baker
Monday 25 July 2011 14.01 EDT

There is a full-fledged drive to cut social security benefits by lowering the annual cost of living adjustment for people already receiving benefits. The plan involves changing the index for calculating the cost of living. The new index, which is known as the "chained consumer price index" (CCPI), typically shows a rate of inflation 0.3 percentage points less than the CPI currently used to adjust benefits.

A reduction of 0.3 percentage points in benefits may seem small, but this will accumulate through time. After being retired ten years, benefits will be almost 3% lower with the CCPI. After 20 years, the loss will be near 6%, and after 30 years, the reduction in benefits will be close to 9%. This is a serious loss of income for seniors, the vast majority of whom rely on social security for most of their income.

The justification for the change in the benefit formula is that the CCPI takes account of the substitutions that consumers make in response to changing prices. The classic story is that if the price of beef rises and the price of chicken doesn't, people will buy more chicken and less beef. The CCPI takes this switching from beef to chicken into account in calculating inflation. The current CPI does not.

While there is an argument for taking account of this sort of substitution in the index, there are two important issues that arise when evaluating the cost of living of seniors. First, their consumption patterns differ substantially from the rest of the population. They consume more healthcare and fewer computers.

The Bureau of Labour Statistics (BLS) has constructed an experimental index that tracks the consumption patterns of the elderly (pdf). This index actually has shown a somewhat higher rate of inflation than the CPI currently used to adjust benefits. In other words, it implies that the current cost of living adjustment is too low, not too high.

The other problem is that it is not clear that the elderly would be as likely to make consumer substitutions in response to price changes as the rest of the population. There are three reasons for this. First, many of the items consumed by the elderly don't lend themselves well to substitution. If the price of heart surgery goes up, people are unlikely to substitute other medical care. Healthcare and shelter together account for almost half of the consumption basket in the elderly index. Second, they tend to be a less mobile population. This means that if responding to a change in prices means travelling further to shop, the elderly might be less capable of doing this than the rest of the population. Finally, older people may just be more set in their ways. If they have been eating beef twice a week for 40 years, they may continue to eat beef, even if the price does rise.

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