Over the last several months, federal policymakers have been considering changing the inflation measure used to calculate the annual cost-of-living-adjustment (COLA) of Social Security payments from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) with the chained-CPI. On Friday, the U.S. Senate voiced opposition to adopting the chained-CPI, although President Obama and a lot of powerful groups are pushing it as a way to shore up Social Security and reduce the federal deficit.
The problem with this logic is that Social Security does not face any real short-term solvency problems (nor does it contribute to the deficit) and that adopting the chained-CPI would reduce benefits while failing to capture price changes on the goods and services seniors most likely consume.
While the chained-CPI might be a more realistic measure of price changes for the population as a whole, it is not a more accurate measure of the cost of living for seniors. That’s because seniors tend to devote a larger share of their income to health care, which has grown more rapidly than other services and goods that the general population consumes. If policymakers are interested in indexing Social Security to a more realistic measure of changes in expenses among seniors they could adopt the experimental elderly price index (CPI-E) that the Bureau of Labor Statistics (BLS) has constructed for seniors over the age of 62. According to economist Dean Baker, over a 10-year period, adopting the chained-CPI would reduce benefits by roughly three percent, after 20 years six percent, and after 30 years nine percent.
It is also important to recognize that while Social Security benefits are quite modest – the average benefit was $13,381 in 2010 in West Virginia – they are a large source of income for the state. In fact, they are a larger share of West Virginia’s personal income (9.5%) than any other state in the country. Therefore, any reductions to the benefit would greatly impact the state’s income base and its large share of seniors.
A lot of West Virginians depend on Social Security for their retirement. In fact, approximately 31 percent of seniors on Social Security in West Virginia rely solely on Social Security for their retirement income and two-thirds of seniors rely on it for at least 50 percent of their income.
Social Security is also the central reason why so many West Virginia seniors are not in poverty. As the chart below shows, over half of all seniors in West Virginia would be considered poor (less than $10,788 annually) without income from Social Security. All together, it lifts 113,000 West Virginia seniors out of poverty.
While the chained-CPI may sound like a small technical change to some folks in Washington, it is not something that is in the best interest of West Virginia seniors or the state’s economy.
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