Retirement Insights
A cut to the CPI could cost you money.
Americans who depend on Social Security benefits have, once again, averted disaster. So far this year, AFSCME and other senior citizen advocates have beaten back the Constitu-tional Balanced Budget Amendment and an effort to reform the Consumer Price Index (CPI) — two back-door attempts by congressional leaders to cut Social Security. Here’s how the CPI battle unfolded.
The CPI is the annual inflation measurement that determines the Social Security cost-of-living adjustment (COLA) and other pocketbook items such as wage and tax bracket adjustments.
Late last year, a commission of five economists — appointed by the Senate Finance Committee and led by Stanford University’s Michael Boskin — concluded that the CPI overstates inflation by about 1.1 percent. The panel recommended reducing the CPI, a move that would hit average Americans hard: If the panel’s recommendation were in effect today, the loss to the average elderly household would be over $2,000 in the year 2002, primarily the result of six years of compounded reductions in Social Security COLAs and rising income taxes. For many public retirees, the loss would be even greater because COLAs in numerous public pension plans also rely on the CPI.
"In our area, we’ve got some very elderly retirees who get as little as $80 a month in their pension," said Minnesota Retiree Chapter 65 Pres. Paul Schroetter. "How could they withstand the burden? Over a period of time, the loss in COLAs would create a snowball effect and, after four or five years, we’d all really start to feel it."
BUDGET TRICK. Senate Majority Leader Trent Lott (R-Miss.), the champion of the Boskin view in Congress, and others on Capitol Hill have been pushing the plan because anytime Social Security is cut, the Social Security Trust Fund grows larger and appears to offset the deficit in the rest of the federal budget. This little bookkeeping trick would allow Congress to make fewer budget cuts and give bigger tax breaks this year without raising the federal deficit — even though Congress can’t actually spend Trust Fund monies on any government expenditures other than Social Security benefits.
Don Buckner, a Minnesota Retiree Chapter 6 board member, is concerned that some in Congress unfairly target seniors. "We shouldn’t have to bear the burden of balancing the budget," he says, "especially when Social Security doesn’t contribute to the deficit. For a significant part of the senior population, Social Security is 80 or 90 percent of retirement income."
During budget negotiations in May, President Clinton and Republican congressional leaders had virtually agreed to a CPI reduction when the Congressional Budget Office found $225 billion in new government revenue. As a result, the two sides were able to put together a budget resolution without some of the original revenue-raising proposals — including the CPI reduction.
It is clear, however, that as long as the Trust Fund sits there looking like a giant piggy bank, Congress will keep this CPI issue in reserve.
POLITICAL CALCULATION. But is Boskin right? Does the CPI overcompensate for inflation? There are economists on both sides of this highly technical issue. Senior groups such as the American Association of Retired Persons and the National Council of Senior Citizens take the position that the determination ought to be made scientifically, not as a politically motivated effort to hide the federal deficit. They say the issue doesn’t belong with congressionally sponsored commissions but with the Bureau of Labor Statistics (BLS), which currently determines the CPI by studying the prices of thousands of goods and services.
While senior groups find Boskin’s approach suspect, they have no problem with the BLS looking at ways to enhance the CPI’s accuracy. In fact, BLS Commissioner Katherine Abraham has publicly stated that more study needs to be done on how the CPI specifically reflects seniors’ spending. An experimental index shows that living costs for this age group may actually exceed official increases in the CPI, due to seniors’ disproportionately higher spending on health care services.
Charlotte Bageant, vice president of Washington Retiree Chapter 10, thinks this may be true. "With health care costs skyrocketing, seniors have had to spend more and more money out of pocket. Any reduction in COLAs would put some people in dire straits."
