Chained CPI Explained

The proposed cuts now on the table could be seriously bad news for young people planning to enter the workforce in coming years.

For most teens and twentysomethings, the raging debate in Washington over Social Security reform probably seems as relevant and engaging as PBS’s Friday night lineup of  Antiques Roadshow and Jerry Lewis:  Live from Las Vegas

But the proposals on the table could be seriously bad news for young people planning to enter the workforce in coming years. 

President Obama has offered to break the sequester gridlock by recalculating inflation in a way that would reduce Social Security benefits. The Business Roundtable, a club of hundreds of large company CEOs, likes Obama’s idea but wants to go even more draconian by also increasing the Social Security retirement age from 67 to 70.

What does any of this have to do with the youngsters? Both of these moves will keep seniors working longer. That means fewer job opportunities for younger workers coming behind.

Americans already work longer than those in other advanced economies.  Nearly 30 percent of those in the 65-69 age group in this country continue to work (versus the OECD average of 18.5 percent), up from 24 percent a decade ago. That percentage will likely rise if Social Security is cut further.

Of course none of this matters much to those who are pushing hardest for Social Security cuts. In a new report I co-authored at the Institute for Policy Studies, “Inequality in Social Security Debate,” we analyze the retirement situation for CEOs of two health industry firms that are members of two corporate lobby groups are pushing for benefits cuts -- the Business Roundtable and the “Fix the Debt” campaign. 

The two CEOs, Larry Merlo of CVS Caremark and Stephen Hemsley of UnitedHealth Group, each have gilded corporate retirement funds that would deliver them $263,169 and $104,671 respectively each month starting at age 65 and continuing for the rest of their lives.  For them, Social Security is a miniscule portion of their expected retirement income.  In fact, if both of the proposed benefit reductions explained above go into effect, Merlo would stand to lose only 0.3 percent of his retirement income and Hemsley would lose only 0.7 percent. 

To illustrate the extreme inequality in the debate, we analyzed how the same reforms would affect someone at the bottom of the health care industry. Rhonda Straw, a home health aide from Pennsylvania, agreed to share with us her personal financial information.

Her job involves administering medications, checking vital signs and communicating with other members of the health care team about patients’ conditions. She works hard and loves her job, but finds it hard to live on the $9-an-hour her 40-hour a week job provides. Unlike the two corporate CEOs, she has no company retirement plan and finds it impossible to save for her retirement after paying for all her other bills. She has $475 in her 401(k), which if converted to an annuity at age 65 would provide her a check for $2 each month for the rest of her life.

Rhonda Straw will be completely dependent on Social Security when she retires. As a result, she stands to lose a much larger share of her expected retirement income from the proposed cutbacks.  Whereas the two CEOs’ loss would be negligible, Straw would likely lose nearly 16 percent of her benefits.

Straw is not alone in her reliance on Social Security. Half of American workers have no retirement plan other than Social Security, according to Census Bureau data. The Social Security Administration estimates that 23 percent of elderly married couples and 46 percent of elderly unmarried recipients receive more than 90 percent of their monthly income from Social Security.

Years of corporate cuts to employee pensions and unchecked rises in health care costs have turned the hopes of golden years for many to tin. More than 22 percent of those 65 and older live in poverty in the United States, the seventh-highest level of elder poverty among the 30 member nations of the OECD. The poverty rate among seniors in the United States is more like Mexico’s (28%) than Canada’s (6%), Germany’s (8%) or the United Kingdom’s (10%).

The changes to the cost-of-living formula used by Social Security proposed by President Obama may sound small at first, reducing recipients’ checks by a few dollars every month. But the formula, known as chained CPI, is cumulative. You lose a few dollars this month. Next month you lose those same dollars and a few more.  After 20 years the average Social Security recipient’s check will be more than $100 less than it would be under the current formula. To make matters worse, many economists argue that the existing cost-of-living formula already penalizes seniors because it fails to reflect the higher proportion of health care expenses in most seniors’ budgets, and the reality that health care inflation has outpaced broad inflation for many years.

When we asked Rhonda Straw when she expects to retire, she said simply: “I’ll never be able to afford to retire.” Therein lies the problem for young people and for those who have struggled with long-term unemployment.

Washington should be focused on solving the persistent jobs crisis. Instead, they’re embroiled in an irrational debate over cuts to Social Security – cuts that would only make the jobs crisis worse. If Congress falls for this austerity mania, job opportunities for young workers may become as rare as the sight of CEO in a bread line.

Link to original article from AlterNet

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