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With President Obama seriously considering including a chained CPI in the budget he'll release next week, the National Journaltakes a close look at the chained CPI, questioning whether it's the right formula to apply to people on fixed incomes like Social Security beneficiaries and veterans. The article gets to the core problem: These groups aren't regular consumers, and shouldn't lumped in with them.
Seniors spend money differently from the average person. Health care accounted for 13 percent of spending for those 65 or older at the time the Center for Retirement Research wrote its paper. It accounted for 5 percent of spending for the general population. Not only do the elderly spend more on health care, but those costs also grow faster than others. [...]
More research also needs to be conducted on how—and whether—the low-income elderly substitute goods, according to the Center for Retirement Research. For low-income seniors, most of their spending goes to essential items such as food, housing, transportation and health care. Because they are already spending so little, they may not have as much room to maneuver around price hikes.
“With little ability to respond to price changes, the poor have no mechanism to offset the full brunt of a price increase,” the center wrote in its report.
The AARP, which has been at the forefront in trying to educate the public and policy makers about the problems a chained CPI would pose for seniors, writes about [pdf] an alternative CPI indexed specifically for the elderly, CPI-E. The government tested the measure from 1982 to 2010, and found it outpaced standard inflation by 0.27 percentage points annually. That's largely because of the out-sized portion of seniors' budget taken up by health care expenses, which consistently outpaces other areas. The AARP graphed out what a CPI-E versus the chained CPI (C-CPI-U) would look like for the average retirees years on Social Security:
So, with the CPI-E, benefits grow as a person ages, and as their health care needs and expenses also grow. The chained CPI does exactly the opposite, shrinking benefits in the years an older person has more out-of-pocket medical expenses. The Social Security Administration estimates that 34 percent of those age 80 or older rely on the benefits for at least 90 percent of their retirement income. That means a third of the really elderly population would be in danger of real poverty, increasing as they age, under a chained CPI.
It's the wrong policy for a population that is already feeling a major financial squeeze, and should not be a part of President Obama's budget plan, or a concession for that ever-elusive grand bargain with Republicans.