Chained CPI -- Much Ado About Nothing

A lot is being said about President Obama’s brave gesture to control entitlement spending in his new budget for 2014.  He is apparently compromising by agreeing to change the cost-of-living adjustment for social security benefits. He says we can save some money by using a chained price index instead of a wage earner index. I thought it was illegal these days to put wage earners in chains, but maybe I don’t understand this whole thing.

The President’s proposal, according to my absolutely perfect estimates, will save Social Security (SS) approximately $2.7 billion per year. Keep in mind that our current annual government spending is closing in on $4 trillion. You don’t have to be a math major to realize how small $2.7 billion is compared to $4 trillion. Graphics can sometimes work. Imagine Dolly Parton’s bra. That’s what the government spends each year. Now imagine…Never mind. You know what I mean.

The Labor Department has data on price indexes so I compared the chained price index (CPI-C) values to those published for the Urban Wage Earners Price Index (CPI-W). We don’t actually know what inflation will be in the future but if it is anything like it was in the past, then we can make estimates of the effect of the new index. The CPI-W is what is now used to adjust social security payments for inflation each year. The President wants to replace it with the CPI-C. Comparison data is available from 2000 to 2012 on the BLS website. Using the price index data I calculated two annual inflation rates for each year from 2001 to 2012.

Guess what I found? Guess Again. Isn’t this fun! Anyway, the differences between the inflation rates of CPI-C and CPI-W didn’t add up to a hill of beans. In 2004 the average SS recipient would have lost $15 if the government had used the CPI-C instead of the traditional CPI-W. Seriously – that’s about a buck a month. 2010 would have been the worst year for social security recipients – they would have lost $94 that year if the CPI-C had been in place in that year or just a little more than $8 per month (a pack of Marlboro?)

If we add up over all 12 years from 2000 to 2012 I find that President Obama’s huge concession would reduce the SS benefits of the average recipient by a little more than $513 (in 2013 prices). During those 12 years this person would have received more than $168,000 from SS. The proposed approach will have cost them $513. Please! You people talking about the President’s brazen compromise, please think about these numbers. He is causing almost no harm to SS recipients and he is doing absolutely nothing to resolve the national deficit and debt problem.

Why do we see such big numbers reported in the news? The answer is that they are projecting changes for the future. They do not know what the future inflation rate will be so they are making forecasts. One thing is for sure about the future – they are projecting that inflation will increase. So when they estimate that the impact on us will be something like $130 billion in the future, they are basing this number on a lot of inflation in the next decade. $130 billion received in say 2023 will be based on people having MUCH HIGHER incomes and social security benefits. Comparing $130 billion a year to current budget numbers is the old Apples and Oranges trick. This trick is meant to scare you.

One more point. There is nothing to guarantee that this proposed change to a chained index will always save the government money relative to a fixed-weight wage earner index. It is true that a chained index allows for the calculated price level to incorporate buyer’s adjustments away from the highest priced goods. But the truth is that people do not always behave that way. If during a particular year we have people gravitating to very popular but higher prices goods, then the chain index will show a HIGHER inflation rate than the CPI-W. 

Maybe the president should stop looking for things that are politically pleasing and focus on the real business of budgets and compromises. As for you – like good consumers everywhere you can beat the system.  Recall that the CPI is an average of prices paid by the “average” household. Don’t be average! You can make your future SS dollars go farther if you work hard at being a good buyer. If the price of orange juice is going up, then just drink more drinks whose prices are not going up. Try a nice tall glass of JD!