Thursday, July 7, 2011

The facts about Social Security and chain weighted CPI

- by New Deal democrat

There is a small furor in the political blogosphere today about Obama offering to index Social Security benefits to the "chain-weighted" CPI vs. the CPI for all urban workers, or CPI-W (the traditional measure). There is a lot of misinformation or poor information out there, including an article at the Great Orange Satan claiming that the resulting cut would only be 14 cents a month for the average recipient. Here are the facts.

Data for the chain weighted CPI has only been collected since December 1999. During the first 10 years, while the CPI-W rose 30%, the chain-weighted version rose 26.6%. On an annualized basis, that is 2.45% vs. 2.20%. In other words, so far chain-weighted CPI has averaged 0.25% less a year.

The diary on G.O.S. appears to take the 10-year average and then divide by 10, with an example that under the current system, a $1044 monthly benefit would rise to $1075.32 (a 3% increase). The diary claims that under the chain-weighted system, the payment would only go down 10 cents a month, to $1075.22. This is nonsense, it posits a change of .001%, not the .25% based on the evidence of the last 10 years.

In fact, under a chain weighted system, as opposed to the hypothetical 3% increase, the chain-weighted increase would be to $1071.77.

That's still only $3.55 a month.

The problem is, the changes are cumulative. Each year the chain-weighted index falls back further and further.
By the end of 10 years, the .25% loss of the chain-weighted increase would result in a net loss of 3.4%.
After 20 years, the loss is 5.4%.
After 30 years, the loss is 8.3%.
After 40 years, the loss is 11.1%.
After 50 years, the loss is 14%. And so on.

Hence David Dayen calculated the cumulative loss to a person retiring in 2012 would sustain a $500 loss in the year they turned 75, and a $1000 loss in the year they turned 85 under the chain-weighted system.

A tail-end boomer retiring in 2022 would face the $1000 cut by the time they turned 75.
A Gen-Xer retiring in 2032 would start out with the $1000 cut and it would get worse from there.
An early Millenial retiring in 2042 would start out with a $1500 cut a year compared with present benefits.

Those are the facts. I will leave you to your own opinion. BTW, feel free to educate the DKers, since I won't be cross-posting this.