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A Plan to Change How Social Security Benefits are Calculated will Reduce Your Retirement Income

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Written by Gregory Heires   
Sunday, 10 February 2013 08:34

By GREGORY N. HEIRES
As deficit talks resume in the coming months, Social Security will once again likely be targeted for cuts.
One of the more popular proposals among Washington insiders is to change how inflation is calculated when benefits are set each year.
Proponents like to depict the adjustment as a technical tweaking that provides for a more accurate measure of inflation. But, in reality, the change is about cutting Social Security.
The new inflation measure, known as the “chained” Consumer Price Index, would reduce the annual cost-of-living adjustment by 0.3 percent.
A small amount?
Well, no, if you rely on Social Security for most of your retirement monthly income, which is the case with most retirees.
The reduction would slash the Social Security benefit by 3 percent over 10 years ($135 billion)--and 6 percent over 20 years. That’s a substantial sum when you’re living on a fixed income, so this change would be a big hit on the poor.
How does this change work?
Currently, the adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, which is calculated by using price changes in a number of consumer goods. The “chained” CPI is determined by tracking price changes according to how consumers switch their preferences and expenditures by deciding to spend more on, say, chicken when the price of meat goes up.
But if the supporters of the chained CPI really cared about improving the accuracy of calculating inflation—and not finding a spurious justification for cutting Social Security—they would be talking about using another U.S. Bureau of Labor Statistic index based on the actual spending of seniors. But guess what? That index shows that the price increases of the products seniors purchase fall below the standard measure of inflation.
Unfortunately, the chained CPI controversy with all its technicalities is a debate that policy wonks love to engage in and doesn’t enter the radar screen of most of us. But if implemented by the U.S. Congress and the Obama administration, the change would drive down our living standards—and the middle class and the poor will be hurt the most.
The adoption of the chained CPI would also be another blow to retirees and baby-boomers approaching retirement.
Already, middle-class retirees are squeezed because of low interest rates, which have significantly reduced earnings from their savings. Workers nearing retirement—who have already been walloped by the 2008 financial debacle and now realize that their 401(k) plans are going to fall short—are in line to take another dagger.
The chained CPI would be a new factor—added to the end of traditional pensions, failure of the 401(k)s as reliable retirement savings plans, and stagnating and falling wages--forcing workers to remain in the labor force until they drop. Will this never end?
The Social Security crisis is a phony crisis. The system will remain solvent until 2033, according to the trustees’ estimate.
The projected deficit of Social Security would be largely wiped out if only Congress would lift the payroll cap—currently $113,700—and require the wealthy to pay more.
Most workers earn less than the cap, so they are being taxed on their full income. Why not ask the wealthy to assume that same burden instead of adopting the chained CPI, which will be yet another blow to the middle class and the poor?

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