South By North Strategies, Ltd.

Writing in The Guardian, Dean Baker of the Center for Economic and Policy Research explains how there is nothing “technical” about changing Social Security’s annual cost of living adjustment. Instead, it is a backdoor way to cut 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.
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The justification for the change in the benefit formula is that the CCPI [chained consumer price index] 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 [consumer price index] does not.

Baker goes on to recommend the following:

At this point, we don’t know what a full elderly index that included substitution would show about the cost of living for the elderly. However, if the point of changing the indexation formula for social security is to make the indexation more accurate, then it would seem that we would want to find out. In other words, if the people who claim to want a more accurate cost of living adjustment are being honest, then they should be calling for the BLS to construct a full elderly index. This index would then be used for adjusting social security benefits. At this point, we don’t know if this index will show a higher or lower rate of inflation. We just know that it will be more accurate.