Thursday, April 25, 2013

Indexing Social Security: What You Need to Know!

On April 18, 2013 the 'Congressional Budget Office' (CBO) came out with a report entitled,
Using the Chained CPI to Index
Social Security, Other Federal Programs,
and the Tax Code for Inflation

The whole concept of 'chained CPI indexing' assumes that by reducing Social Security payments seniors will buy alternative cheaper items and still be able to afford basic needs. However seniors' needs are different then most other age groups. The chart below represents a comparison over the last 30 years between two methods of calculating the effects of 'Chained CPI indexing. The one doesn't factor in seniors requiring different expense then the rest of the younger population. The other does. About 30% of those over 62 years of age rely on Social Security for 90% of their income while presently 13% of us as a nation are 65 years or older. So this is a big deal.

Overlooked is the elephant in the room. Seniors spend almost three times more on out-of-pocket health costs. Health costs which have risen disproportionately faster then the rest of ordinary inflation.

Everyone should readily see that those relying on Social Security for most of their income will not be able to find cheaper alternatives for their current healthcare coverage . Compounding this problem for them are the increasing monthly costs for Medicare and the supplemental plans coupled with ever decreasing Medicare payments to doctors, hospitals, nursing facilities as well as for medications.

Below is a chart for all 3 CPI methods of calculating future Social Security payments courtesy of The AARP

The GREEN is what Obama & Congress have in mind
The BLUE is the CPI adjusted specifically for seniors The CBO report mentions
(The latter being something I haven't heard either one of them discuss)

Here's Another Thought. Most seniors spend every dime of their retirement income which puts it right back into the economy. It isn't like they are taking their Social Security check and investing it for sometime in the future. So giving them a couple of bucks more to live on isn't as though the money won't be spent to help keep the economy growing. On the other hand if you take out $339.8 billion in total from changes in the program over the next 10 years, that's $339,800,000,000 less seniors have to pump back into the economy.
* * *

Some Highlights From THE CBO REPORT
"The chained CPI grows more slowly than the traditional CPI does: an average of about 0.25 percentage points more slowly per year over the past decade. For example, if such a proposal took effect next year, Social Security benefits would be roughly $30 a month lower, on average, by 2023 than they would be under current law, representing a reduction of about 2 percent of average benefits

...The consumer price index reflects prices paid for the goods and services purchased by an average household, not by any specific individual or by the average person in certain age groups, income groups, or other categories. Therefore, most people experience price changes that are either higher or lower than reported in the CPI.... The possibility that the cost of living may grow at a different rate for the elderly than for the rest of the population is of particular concern in choosing a price index for Social Security COLAs because Social Security benefits are the main source of income for many older people....

... BLS computes an unofficial index that reflects the purchasing patterns of older people, called the experimental CPI for Americans 62 years of age and older (CPI-E). Since 1982 (the earliest date for which that index has been computed), annual inflation as measured by the CPI-E has been 0.2 percentage points higher, on average, than inflation as measured by the traditional CPI-U or the CPI-W.

... The longer-term difference between the growth rates of the CPI-E and CPI-U mainly reflects the fact that a larger percentage of spending by the elderly is for items whose prices rise especially quickly. In particular, compared with the overall population, the elderly devote a much larger percentage of their spending to medical care. That difference in spending patterns alone accounts for about half of the long-run difference between the CPI-E and the CPI-U.

... The CPI-E differs from the CPI-U only by using different percentage weights for the 211 categories of goods and services in the CPI market basket. For the CPI-E, BLS calculates those weights on the basis of the spending patterns of people ages 62 and older as observed in the Consumer Expenditure Survey, whereas for the CPI-U, BLS calculates expenditure weights on the basis of the spending patterns of all urban consumers in the survey.

Published on April 24, 2013

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