Feb 27th, 2013 | By | Category: Senior Moments Blog, Social Security & Medicare

Understanding the Chained-CPI

Our elected representatives in Washington DC are looking at changing the consumer price index (CPI) because they can lower it by about 0.3 percentage points per year. Such a change will reduce Social Security benefits. A recent AARP post said a “…typical beneficiary –with an annual income of roughly $20,000–will lose over $2000 dollars of benefits over 10 years.”

The ‘chained CPI‘ is a theory that consumers will buy lower cost goods when prices of those kinds of goods go up. For example, when prices of cashmere sweaters go up, people will buy cotton or wool sweaters instead of cashmere. The stickler here is that this substitution effect does not reflect the spending habits of senior citizens. More than half of all seniors live on fixed incomes which are quite modest. Our opportunity for substitution is less because we already choose lower priced sweaters. And the costs of things we spend money on do not have lower priced substitutions; e.g., utilities, medical care, health insurance).

The other problem is that the CPI is based on what workers buy, not what retirees buy. The current CPI does not include the increased health care costs that we seniors live with. So the results are already skewed against seniors. Changing the CPI as currently proposed just increases the hit seniors take.

Fairness with Solving the Deficit Problems

The deficit issue should not be resolved on the backs of seniors. We already live on fixed incomes. The ability of many to purchase anything other than basic necessities is severely limited. Decreasing the income of seniors living on about $1200 a month just doesn’t make sense.  It is neither fair nor honorable, let alone moral. Congress and the Administration need to look at other ways to solve the deficit. They need to stay away from Social Security and Medicare, for all the right reasons.

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