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TSCL Leads Opposition to `Greenspan COLA Cut`
The Cost-of-Living Adjustment (COLA) is under attack and Congress may attempt to “chain” it down soon. TSCL believes that Congress may be eyeing a ruse that worked well in the past to cut COLAs and hike taxes at the same time — by relying on economists at the Bureau of Labor Statistics to change the way inflation is measured. The plan comes at the same time that Congress is considering plans to partially privatize Social Security – a COLA cut would help pay for part of the expensive scheme that’s estimated to require some $2 trillion. Because COLAs are calculated using the Consumer Price Index (CPI), a CPI that grows more slowly will cut COLAs. Because COLAs are used in the benefit formula, future retirees will receive lower benefits than they would have if no changes were made. In addition, the CPI is also used to increase income tax exemption levels. Taxpayers are bumped into higher tax brackets when their incomes increase, but personal exemptions rise more slowly. Thus they pay more in taxes. Seniors may be surprised to find that a higher portion of their Social Security benefits is taxable. Because the Bureau of Labor Statistics makes the changes, Congress ducks the political fall-out for cutting benefits and hiking taxes. Proposal To Chain the CPI is a Decade Old As this issue goes to press, TSCL anticipates that Federal Reserve Chairman Alan Greenspan will again recommend that Congress cut entitlement spending by switching to a new more slowly growing “chained” CPI. The “chained” CPI was one of several changes recommended by the 1996 Boskin Commission. The Commission said that the CPI overstates inflation by about 1.1% and thus overpays seniors. In 1997 Chairman Greenspan testified on the CPI before the Senate Finance Committee and agreed with the Commission’s findings, saying “there is almost a 100% probability that we are overcompensating the average Social Security recipient for increases in the cost of living.” Congress appropriated funding for implementation of the recommendations of the Boskin Commission, including the development of the chained CPI. In August of 2002, the Bureau of Labor Statistics began publishing the new index. Between December 1996 when the Boskin Commission issued its final report and June 1999, the Bureau of Labor Statistics made several methodological changes that slowed the growth of the CPI. By 1998 the federal budget began to show a surplus a portion of which was likely due to slowing entitlement spending and rising tax revenues from the CPI changes. In 1998 TSCL became the first seniors organization in the nation to warn of the coming COLA cuts that would be caused by the so-called technical “improvements” to the CPI. TSCL’s early estimates set off a storm of controversy. Seniors wasted no time in contacting their Members of Congress, proving TSCL’s ability to motivate grassroots action. TSCL’s estimates of the COLA cuts received harsh criticism from the Social Security Administration, but three years later TSCL’s warnings proved conservative. In an article that appeared in the December 23, 2001 issue of The New York Times, the Social Security Administration itself estimated that a worker with an average wage rate who retired in 2002 at age 65 and then collected Social Security until death at 82 would receive $318,000. Assuming the index were cut by 1.1% points as the Boskin Commission recommended, the retiree would receive $277,000, or $41,000 less. In the article “CBO Makes Massive Revision to Inflation Estimates,” in our May 2004 issue of The Advisor, we reported that the Congressional Budget Office has revised its CPI assumptions three times since 1998. When added together, the CPI’s rate of growth is now estimated to be about 1.5% lower than it would have been using the earlier methodology. These are changes that have already been made to the CPI and do not include the effect of switching to the “chained” index. The chained CPI grows more slowly because it attempts to measure consumers’ reaction to price changes. For example, if the price of going to the movies goes up, consumers may rent more videos. Consequently, the chained CPI does not reflect the full increase in the price of movies (or other goods and services), and thus rises more slowly than other indexes. TSCL believes this makes the index inappropriate for use in calculating COLAs because it's hard to substitute for health care — if you need a heart bypass operation, you need a heart bypass operation. You can't substitute a bottle of generic aspirin instead. The chart below illustrates how using the chained CPI to calculate COLAs would compare, not only with the current index used to calculate COLAs, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), but also with the Consumer Price Index for the Elderly (CPI-E), which TSCL favors for use in calculating a more fair and representative COLA. How the Consumer Price Indexes Compare Source: Bureau of Labor Statistics To learn more about what TSCL is doing to protect senior COLAs, see “ Better Solutions Exist for Social Security Reform ” on page 3. February 2005 | ||||||||||||||||||||||
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