Posted by: Doug Henwood | December 18, 2012

Correction on Social Security

Sorry, this is very embarrassing to admit, but one must come clean. That last Social Security post, with its rather sensational claims, was wrong. Future initial benefits are set not by adjusting present benefits by the CPI; they’re set by the retirees’ recent average wages. Those initial benefits are then adjusted for inflation over time. So, shifting to the chained index would lower the cost of living adjustment over a retiree’s lifetime, but it wouldn’t affect initial benefit levels.

But the effects of the switch would still be significant. The currently used index, the CPI-W, has averaged 2.5% over the last decade. The proposed C-CPI-U has averaged 2.2%. Assuming a 20-year retirement (not much more than the average life expectancy at the retirement age of 67 for people born after 1960), by the retiree’s final days, his or her check would be 6.2% smaller adjusted by the C-CPI-U than it would be by the current CPI-W method. Take that out to 25 years, and it would be 7.7% smaller.

This statement, however, is still true: these are not “tweaks.” They’re serious cuts.

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Responses

  1. The question I have is not whether or not the Chained CPI would reduce future benefits…the question is whether or not the Chained CPI is a more accurate reflection of actual expenses for retired and elderly citizens?

  2. [...] Yesterday we argued for carrying the culture war into the heart of the American political economy. We made the very broad claim that a defining feature of our economic culture is the acceptance of limits. This might seem like a strange thing to say. Surely the last decade was marked not by limits but by a failure to acknowledge them. Individuals, businesses and eventually governments borrowed well beyond their means. That, so the story goes, was what created the credit crunch and the stagnant new normal. It is certainly the narrative behind the growing deal, in which Republicans appear to be ‘conceding’ on some tax hikes while Democrats accept 5-10% cuts to Social Security. [...]

  3. I’m not sure I understand. Aren’t initial benefit levels calculated using _inflation adjusted_ average wages? And the averaging goes back 35 years, so that adjustment matters a lot. If a lower rate of inflation is used to compute the average, past wages will pull down the total. I haven’t worked through the details, but I think this represents a cut over and above the losses due to reduced cost of living increases.

  4. COLAs start at age 62 (not at retirement or when the recipient starts receiving Social Security), so your 20 year number above would get you to 82, less than the average life expectancy of a retiree.

    “Future initial benefits are set … by the retirees’ recent average wages” is not quite right, I think. They’re set by the highest 35 years of adjusted wages. These wages are adjusted, not by inflation, but by the growth in the average wages, until the year the recipient turns 60, after which these adjustments stop (and the CPI adjustments start at 62).

  5. Don’t worry, Doug, I’m sure someone will cut Social Security again so, at the very least, your previous numbers will be correct.

  6. Yes, as you say these are serious cuts to a benefit that people paid a lot of money ‘into’ over the years. Social Security income is already not liveable in most places anyhow, 5% is not tolerable.

  7. I call the chained CPI the”Let them eat cake” provision.Or maybe eventually,”Let them eat dog food

  8. Everyone makes mistakes. Few correct them, let alone publicly, let alone when one is a pundit. Good on you!


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