Why Inflation Matters for Social Security

http://blog.aarp.org/2012/12/13/why-inflation-matters-for-social-security/?sf7861121=1

Posted on 12/13/2012 by Jonathan Peterson

One of Social Security’s great strengths is that it offers meaningful protection against inflation.

Each year, the program considers how prices are rising [as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers]. If prices go up, the Social Security benefits people have earned tend to be adjusted as well.

For a typical household, this protection is huge – a point I tried to emphasize in my book, “Social Security for Dummies.” It helps people keep up their standard of living as the years pass. Otherwise, inflation will eat it away. In 20 years, an inflation rate of 3% would cut a dollar almost in half [to 55 cents]. And, of course, this process doesn’t stop.

So any change to Social Security’s inflation protection is a potentially serious matter.

Which brings us to a proposal known as the chained CPI (see related video). Some in Washington want to use this index as the way to compute Social Security’s cost-of-living adjustments – and save money – in the coming years.

The chained CPI yields smaller cost-of-living hikes than the current gauge – about 0.3 percentage points less per year. That’s because it assumes that when prices go up, consumers have greater ability to substitute purchases across categories.

It’s a theory that may work when you’re talking about buying chicken breasts instead of prime rib. But it’s dubious for health care services, a very large expense for many who depend on Social Security, including older Americans and people with disabilities.

Under a chained CPI, the oldest beneficiaries would lose the most. In fact, retirees lucky enough to live to 92 would lose a month’s worth of benefits, compared to current law. Workers with disabilities and other long-term beneficiaries also would end up with a lot less.

The reductions with a chained CPI would disproportionately affect the poor, who may get all their income from Social Security, and women, who generally live longer than men. The oldest widows, many of whom barely scrape by, would be among the main losers.

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