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Trading one flawed Social Security formula for another

Apr 10, 2013 - By Kevin G. Hall, McClatchy Newspapers

WASHINGTON -- President Barack Obama's coming push for less generous increases in Social Security benefits is angering his party and perplexing economists, many of whom question why he'd replace one ineffective measure with another.

In his proposed federal budget Wednesday, Obama will urge a shift away from the way the government has calculated benefits for nearly four decades. It would save the government $230 billion over the next 10 years -- which would please those alarmed by sky-high deficits and debt -- but do it by slowing the growth of benefits to the elderly and others -- a cause for alarm among his liberal base that thought his re-election meant such popular entitlements would continue untouched.

Obama will propose to shelve the standard measure of inflation, the consumer price index calculated by the Labor Department, as the basis for automatically adjusting the size of Social Security checks.

Instead, Obama wants what's called a "chained" consumer price index. This alternate way to calculate monthly Social Security benefits involves the assumption that consumers don't always pay higher prices, but rather respond by seeking less expensive alternatives.

The net result is a less generous measure of inflation, which would save the federal government what it pays retirees, the disabled and others on assistance programs such as Social Security, some veterans benefits and other assistance programs. That weaker cost-of-living adjustment means less generous benefits for current and future retirees over the course of their retirement.

"That's not just malarkey, that's damn malarkey," Terry O'Neill, president of the National Organization for Women, shouted during a small but spirited midday rally against the proposed change Tuesday in front of the White House.

Social Security first paid monthly benefits in 1940. Congress voted to raise benefits in 1950 and again in 1952. Since 1975, the benefits have been adjusted annually based not on a vote of Congress, but on the annual rate of inflation as measured by the consumer price index.

As a candidate and later when seeking re-election, Obama flatly rejected proposals to change the way benefits were increased. White House spokesman Jay Carney explained the about-face Tuesday by arguing that Obama's proposed budget in its entirety does a better job protecting seniors and the most vulnerable than do his opponents.

What angers advocates for the elderly and disabled and surprises economists is that there's so little recognition that the existing and proposed cost-of-living adjustments largely overlook the real prices for seniors and the disabled.

"It's a backdoor benefit cut. It's not a more accurate measure of the costs facing seniors," said Monique Morrissey, an economist with the Economic Policy Institute, a liberal think tank. "If anything, the current (cost-of-living adjustment) underestimates inflation (faced by seniors)."

Here's how. Both the current and proposed gauges of inflation measure changes in prices for products and services purchased by the general population. As a subset of the general population, however, the elderly consume health care and a number of other goods and services very differently than the rest of us.

"It's a one-size-fits-everybody bundle," acknowledged Keith Hall, who served as commissioner of the Bureau of Labor Statistics from January 2008 to January 2012. "Might you not want to focus on the elderly and some of their basics?"

During Hall's time at the BLS, statisticians developed an experimental model that tried to create a consumer price index for the elderly. It's known as the CPI-E, and while it is published monthly by the agency, it is only available through subscription and isn't included in publicly disseminated data.

The effort remains a work in progress, being continued by Hall's successor. The consumer price index is put together by people around the country who go to stores and collect price information on thousands of commonly used products and services. They plug this information into a huge database that compares the changes in prices nationwide and regionally, and the collective effort results in the estimated rate of monthly inflation.

For the experimental measure, statisticians are sifting through price changes in the products commonly thought to be consumed in great proportions by the elderly, especially health care and related products.

"What they didn't do is go and watch seniors buy stuff. It's still very imperfect," said Hall, who thinks doing so would show that seniors actually shop in different places than the broader population. "They've taken the CPI and reweighted it to match the elderly. That's part of the way toward a proper CPI. It's probably not far enough to be useful. The big difference is the elderly seem to shop in different stores."

Now a professor at George Mason University's Mercatus Center in Virginia, Hall noted that the elderly disproportionately shop at discount stores, places such as Big Lots, Dollar General and the like.

Protesting at the gates of the White House, unions and other liberal groups vowed to exact revenge on the president and Democrats if they cut federal spending by tinkering with Social Security benefits.

"If that's your agenda, there will be no cover," vowed Damon Silvers, director of policy for the AFL-CIO, once an Obama ally.

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