‘Chained CPI’ is illogical and unfair

Opinion: November 8, 2011 at 12:00a.m.

By A. BARRY RAND

McClatchy-Tribune

It is ironic that for the first time in three years, seniors recently learned they will receive a cost-of-living adjustment at the same time a congressional “supercommittee” is considering permanently reducing Social Security checks for today’s seniors and future beneficiaries.

As part of a deficit reduction deal, the supercommittee is considering adopting a new way to calculate the COLA, which would cut Social Security by $112 billion over the next 10 years. The so-called “chained CPI” assumes consumers will substitute lower cost items when the cost of what they normally purchase goes up, which could make sense, unless you are a senior with fixed costs.

For seniors who spend most of their income on prescription drugs and health care, this notion of substitutions is illogical and unfair. And, it should be summarily rejected by the supercommittee. Today, many seniors have already had to make difficult decisions about which basic necessities they can afford and are living check to check.

The key rationale for the chained CPI is the idea that consumers can switch to lower-cost items. Yet for many seniors, especially those with disproportionately high health-care costs, this notion of price-sensitive choice in much of what they buy is illusory.

It is not simply a matter of moving farther down the supermarket aisle to purchase chicken instead of beef. Medicare households spend three times as much on health care as other households. The latest figures show that Medicare beneficiaries spend more than $3,000 a year out of pocket on health care. People 65-plus are not indifferent to the benefits of comparison shopping for price, but their freedom to make substitutions, particularly in the area of health care, is often severely limited.

Climbing debt

For many seniors, a chained CPI reflects neither sound behavioral economics nor the harsh economic conditions they face. Half of those 65 and older live on annual incomes below $18,500. Debt has climbed rapidly among households 65-74. Those with pensions and savings have experienced large losses in their accounts. More than six million people 65 and older confront the staggering cost of long-term care. Private pay-assisted living typically costs almost $40,000 a year and nursing home care almost twice as much. Medicare pays for very limited nursing home care and does not pay for assisted living.

A new formula lowering the Social Security COLA would force more Americans into excruciating choices among taking prescribed medication or having an adequate diet or heating their home.

A chained CPI would compound over time, resulting in a lower cost-of-living adjustment each year than would be the case under current law. The benefit reduction would increase as an individual grows older and more vulnerable — just when every dollar becomes more critical. This reduction will take a substantial toll on seniors whose out-of-pocket health care costs rise as they age while other sources of income and assets fall.

The reduction in benefits driven by a chained CPI would cost seniors thousands of dollars over their lifetimes. By age 85, the CPI change would reduce benefits by nearly $1,000 in that year alone. Given the fact that a higher percentage of the population will be reaching 85 and beyond, the damaging effect of this policy change is intensified.

While the claim is frequently made that cutting Social Security to reduce the deficit would not affect current beneficiaries, that assertion is untrue. Proposals to change the COLA would affect those currently getting benefits — meaning today’s seniors would receive larger Social Security reductions over time.

Economic lifeline

For these families, Social Security is not a political line in a debate, it is an economic lifeline at a time when savings have shrunk, health-care costs have shot up, home equity has plummeted, and longevity has increased. Social Security is the main source of income for nearly two-thirds of older American households receiving benefits. For nearly one quarter of older households receiving benefits, Social Security accounts for almost all of their income.

Even though Social Security has not contributed to our large deficits, there are some who see cutting Social Security as a display of political courage. In AARP’s view, it is hardly an act of statesmanship to compound the economic hardship of millions of seniors who are counting on every nickel to pay the bills.

A. Barry Rand is chief executive officer of AARP, the world’s largest nonprofit, nonpartisan membership organization dedicated to helping seniors. Distributed by MCT Information Services.