Tuesday, December 18, 2012

Social Security COLA Formula ... A Long Overdue Change

Social Security payments have long been increased more than appropriate by inaccurate and automatic inflation adjustments over time.

The simple fact is that these increases have actually outpaced the rate of inflation instead of offsetting inflation as originally intended.

Now it appears that the politicians are closing in on reducing the amount of the inaccurate and "inflated" inflation adjustment over time. For the sake of accuracy, it's a change that's long overdue.

While there may be much consternation about any change which lowers Social Security payments, no matter how sensible the change, to present and future retirees, the adjustment makes sense. And its actual impact on paid benefits over time will barely be discernible to beneficiaries as the annual adjustment will be minimal.

At the same time, however, the cumulative adjustment over time will be big, thus helping with the long term affordability and sustainability of Social Security while also preserving the appropriate actual intended level of inflation adjusted benefits.

Then in the future we'll be able to focus on the biggie --- getting control of our runaway medical cost increases. And that will be tough to do --- real tough.

How GOP offer would trim Social Security has the story:

"In the latest round of fiscal-cliff give and take, House Speaker John Boehner has made the most recent big move— agreeing to accept an increase in tax rates on millionaires. In return, he’s looking for a commitment to at least $1 trillion in spending cuts, including reductions in big entitlement programs. And to help get there, according to the Wall Street Journal, he and other Republican leaders are putting a new emphasis on “a proposal to slow the growth of Social Security benefits by deploying a new formula for cost-of-living increases.”
That formula is known among economists as the “chained consumer price index,” or chained CPI, and it actually isn’t especially new: Boehner and President Barack Obama were kicking it around during the 2011 budget talks as well, and it has support on both sides of the aisle. Advocates of using chained CPI argue that the measures the government currently uses to measure inflation, and to set Social Security cost-of-living adjustments or COLAs, are actually too generous. As Ed O’Keefe explains in the Washington Post today, “Policymakers generally make the assumption that when prices rise, people will turn to a less expensive product. They’ll buy chicken instead of more expensive beef, iceberg lettuce instead of arugula, store-brand instead of name-brand cereal.”

Traditional inflation measures don’t catch this change in behavior, some economists think, but a chained CPI would. And using that measure, COLAs would be smaller by what the Congressional Budget Office estimates to be 0.3% each year. Over time, that would add up: O’Keefe calculates that the average person who retired in 2000 at age 65 would be getting about 5% less than he’s currently receiving if chained CPI had been in effect the entire time. But the sting of those cuts would be lessened, advocates say, because they’d be so gradual—and, of course, because the current formula is too generous anyway.

To this line of thinking, the retort of most retiree advocacy groups (including AARP) is: Our raises are already too small. The average Social Security recipient just got a benefit increase of $19 a month for 2013 – a “diet COLA,” to use a favorite pejorative – so retirees aren’t exactly feeling flush. But the real problem is that no inflation measure is keeping up with the biggest cost pressure that most retirees face –rising health care costs. Medicare premiums are rising far faster than Social Security benefits, and they now eat up twice as big a share of the average retiree’s benefits as they did in 2000, according to the Kaiser Family Foundation. As Encore’s Catey Hill reported when chained CPI first started making the rounds last summer, some advocacy groups have lobbied for the government to use a special “CPI-E”–where “E” stands for elderly—that takes soaring medical bills into account.

Bottom line: Just about nobody reacts to medical inflation by saying, “That’s okay, I’ll just shop for a cheaper angioplasty.” Until some kind of reform starts to flatten out that medical cost curve, changes to Social Security COLAs will probably remain a tough sell."

Summing Up

This adjustment makes sense.

Even though Social Security payments will be lower in the future than they would be without the change, the change is necessary to better reflect actual inflation.

It's not been done correctly in the past.

It's also a good sign that our politicians are finally starting to do what's right, even when it's not the popular thing to do.

AARP seems to always take the side against future generations. Obviously that's because the oldsters pay dues to pay the salaries of the AARP leadership.

In my view, the AARP is a great example of special interests lobbying against the greater good, even when what the special interests are advocating makes no real sense.

They just want more from the government, aka the taxpayers, present and future ones as well, regardless of who has to pay for it.

In that regard, the AARP operates exactly like a self interested set of public sector union officials.

Thanks. Bob.

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