In the ongoing government budget debacle the Obama Administration is offering the Chained-CPI as an option for reducing government expenditures. What is the “Chained-Consumer Price Index (C-CPI)” and why should we be concerned?
The Bureau of Labor Statistics calculates the CPI to estimate the effects of inflation on the cost of living. They define a market basket of goods and services and periodically calculate the change in its cost over time relative to a base time. The CPI determines the annual cost of living adjustment (COLA) to be applied to Social Security benefits, veteran benefits, pensions, and other benefit programs. The CPI also is a factor in determining worker compensation and federal tax rates.
The Chained-CPI modifies the cost of this market basket by assuming that price increases cause consumers to seek cheaper options and therefore, spend less than they would otherwise; e.g., instead of buying a big name brand product, the consumer will purchase a cheaper store brand. Using the Chained-CPI rather than the CPI results in a lower COLA. This is assumed to be a more accurate representation of consumer spending. What is not acknowledged is that the cheaper market basket represents a forced reduction in standard of living.
Government policies, as well as increasing market demands, promote inflation, so the COLA is typically an increase. If defined by the Chained-CPI, the new COLA will be less than one determined by the CPI, reducing increases in wage and benefit payments. It also will slow increases in federal tax brackets resulting in higher taxes for those with increasing incomes.
Each year as prices increase, and consumers opt for a cheaper market basket, the Chained-CPI would reduce the COLA accordingly, and lock consumers into further reduction of purchasing power and living standard. If the Chained-CPI becomes the new standard, some consumers eventually will reach a point where there is no cheaper option. The only option is to do without. This process will drive those on marginal subsistence into further poverty, hunger, failing health, disability, unemployment, premature death.
When asking about my benefits at the local Social Security office, I saw an elderly woman who was retiring from her job as a cleaning woman. She was told that she would receive $512.00/month in benefits. As she lived alone and had no other sources of income, she was entitled to food stamps and a waiver of the Medicare deduction. Even with these additional benefits her income would be well below the federal poverty level of $931/month for a single person. About 15% of the population, approximately 46 million people, are surviving on incomes at or below poverty level. What flexibility do these people have for reducing costs?
If the Chained-CPI becomes the standard for determining COLAs, most of us will be “chained” to a continuous reduction in standard of living, with the poorest, most vulnerable, suffering the most. For them there are no cheaper options.
Retirees and disabled persons are not able to switch to higher paying jobs to maintain their real income in the face of inflation. The goal of a COLA for these people is to prevent inflation from gradually lowering their standards of living. At best, a COLA succeeds only in some average sense, enabling some to keep up with inflation and others not. Those who do not can choose between buying less and substituting cheaper goods. Using the chained CPI to compute a lower cost of living increase necessarily leads to some combination of substitution and doing without. It is dishonest for the government to try to explain away the effects of reduced COLAs by suggesting that the persons affected can maintain their standards of living by merrily buying cheaper goods with less money.