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Fri Dec 21, 2012, 10:02 AM

Alan Grayson explains the CPI

from his email:

Let me get right to the point. I'm against the proposed "chained CPI" cut in Social Security because it substantially undermines the protection against inflation that Social Security recipients enjoy under current law. The existing cost of living adjustment ("COLA") already understates actual increases in the "cost of living"; the chained CPI would exacerbate the problem.

I understand that the vast majority of Americans -- including, quite possibly, most people reading this - have no burning desire to learn anything about the chained CPI. It has, however, become a major part of the "fiscal cliff" negotiations, and so it has become one of those things that people have to learn about, for their own protection.

Where we are now in the fiscal cliff negotiations is that Speaker Boehner is talking about reducing the federal deficit in the exact same way that Governor Romney did - Boehner says that he wants to, but he won't tell us how. President Obama, boxed in by the poll-driven sense that he must-must-must propose something "balanced," is "balancing" the reduction of tax breaks for the rich against the reduction of the protection that seniors have against inflation. On the merits, however, reducing that protection is undeserved, unwise and unfair.

Social Security benefits are automatically adjusted each year to reflect increases in the cost of living, as determined by the consumer price index (CPI). The U.S. Bureau of Labor Statistics calculates the CPI each month.

Here is how the "chained CPI" would change things: Let's say that the cost of gasoline tripled, from $3.33 per gallon to $10 per gallon. Most people would call that a 200% increase in the price of gas. That's how it would be calculated under the CPI today. Under the chained CPI, however, it would be calculated at less than 200%, because some people couldn't afford to pay $10 a gallon. They would drive less. They might have to take the bus to work. They might take a "staycation" instead of a vacation.

Because a tripling in the price of gas basically makes everyone poorer, and thus less able to buy gas, the chained CPI doesn't count that as a 200% increase. It reduces the percentage increase in proportion to the amount of gas that people can no longer afford to buy.

In fact, the bigger the price increase (and the poorer people get), the bigger the gap between the actual price increase and the chained CPI adjustment. This effect starts off small, and barely noticeable, but then as time goes by, it swells like a blister. In fact, it swells from $1.4 billion in the first year to $22 billion in the tenth year, according to the Congressional Budget Office. So the chained CPI is inflation protection that, by design, inflation itself erodes. Ain't that just grand?

To make things worse about the chained CPI, there is no evidence that the existing CPI is somehow overpaying seniors. On the contrary, as John Williams has pointed out at shadowstats.com , if the Government simply calculated the CPI today in the same manner as it did through 1990, then every year, the CPI increase would be approximately 3% higher. If the Government calculated the CPI today in the same manner that it did before 1980, then every year, the CPI increase would be approximately 7% higher. That's the sort of thing that happens when you pretend (as the CPI now does) that a computer with a CPU that is twice as fast is the same as a computer that costs half as much.

And let's be honest: you know plenty of Social Security recipients. Have you seen any of them driving a brand-new Lexus, thanks to a COLA increase?

The political proponents of the chained CPI are hoping that you don't understand it. Because when you do understand it, you won't support it. We should be doing more to protect seniors against inflation, not less.

The chained CPI calls to mind something that W.C. Fields once said: "If you can't dazzle them with brilliance, baffle them with . . . " With the chained CPI.

Courage,

Alan Grayson

3 replies, 430 views

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Reply Alan Grayson explains the CPI (Original post)
Jackpine Radical Dec 2012 OP
kelliekat44 Dec 2012 #1
1-Old-Man Dec 2012 #2
Scuba Dec 2012 #3

Response to Jackpine Radical (Original post)

Fri Dec 21, 2012, 10:07 AM

1. I don't support it either. But do it anyway and go back and change it later! Enough already! nt

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Response to kelliekat44 (Reply #1)

Fri Dec 21, 2012, 10:13 AM

2. Far better to stop it now than try get someone to fix it later - because no one can be trusted to

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Response to kelliekat44 (Reply #1)

Fri Dec 21, 2012, 10:14 AM

3. Nope. The cliff is a better deal than that.

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