Social Security's buying power is under attack

That’s right — cut. Not just adjusted to a more accurate measure of inflation, as reformers suggest. Their adjustment would have retirees falling behind their true cost of living.

In fact, there’s evidence that the buying power of Social Security has shrunk already. That’s because prices for things that old people buy rose faster than general inflation for most of the past 30 years, and Social Security checks haven’t quite kept up.

At issue is whether to adopt a new, and lower, measure of inflation for the annual adjustment in Social Security checks. It’s important, especially for those on the bottom of the economic ladder. A third of white retirees and nearly half of black retirees rely on Social Security for more than 90 percent of their income. The average benefit is about $15,000 per year.

If the prices old folks pay rise faster than Social Security payments, more will fall into poverty. Unless baby boomers and retirees start making a political stink — a loud one — they’ll all have a somewhat leaner retirement.

To explain what’s happening, we have to get wonky. At issue are three different ways to measure inflation: a measure for wage earners, a measure for old people, and a “chain” method now being touted by reformers.

Each year, Social Security benefits rise according to the measure for wage earners, known formally as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. It tracks prices on a market basket typical for working people, not retirees.

Critics contend that the measure fails to fully account for how people react to rising prices. Rather than spend more, they often substitute cheaper products.

If the price of beef goes up, you’ll switch to chicken, as my colleague David Nicklaus noted in a recent column. I suppose that if chicken rises too, you might switch to eating beans. You’re not spending more money for food, so your cost of living hasn’t risen.

But if you’re now eating beans, when you used to eat steak, you are certainly poorer.

Enter the “chain CPI,” which takes such behavior into account, and rises more slowly than the CPI-W. President Barack Obama this month offered to switch to the chain CPI for Social Security and other benefits if the Republicans agree to raise tax revenue. The switch — without the taxes — is also on the Republican agenda.

Obama has taken a battering from his own liberal supporters.

“It’s a benefit cut. It’s going to be harder for you to go to the store and afford that gallon of milk,” says Maya Rockeymoore, president of the Global Policy Solutions consulting firm and former research president for the Congressional Black Caucus Foundation.

The chain CPI has been rising about 0.3 percentage point per year more slowly than the CPI-W. That may not sound much, but it can have a big effect over time.

AARP measured its effects using the Social Security’s estimate of inflation in the future. After 10 years of retirement, for instance, a retiree’s check would be 2.9 percent lower using chain CPI rather than the current method, and 5.7 percent lower after 20 years, according to an AARP analysis.

“By the time you’re 92, you’ll lose a month’s worth of benefits,” said Debra Whitman, an AARP economist and former staff director for the U.S. Senate Special Committee on Aging, speaking to a National Press Foundation seminar this month.

The biggest effect would fall on older retirees. They’re often folks who have spent away their savings and face the highest medical bills.

There is strong evidence that both inflation gauges understate costs for retirees. The Bureau of Labor Statistics also keeps an inflation measure based on what people over age 62 actually buy, called the CPI-E. The bureau finds that old people spend twice as much as the rest of us on health care. They also spend more for shelter. They spend less on food, transportation and education.

Over the past 30 years, inflation for old folks has been rising about 0.27 percent per year faster than the index now used to adjust Social Security, largely because of medical costs.

If we adopted the elderly inflation measure, Social Security checks 10 years from now would be 2 percent higher than if we keep the current measure, and 5 percent higher than with chain CPI, according to AARP. After 20 years, the gap between elderly inflation and the chain CPI would grow to 10 percent.

The BLS admits problems with its measure of elderly inflation and calls it experimental. The sample of old people is smaller than statisticians would like, and they’re not sure about the places old people shop and how they go about it.

Also, although elderly inflation has outpaced other price measures over the long term, the gap has narrowed since 2005. That’s partly because of tame housing prices, and partly because medical costs rose more slowly.

The Social Security debate is part of the larger argument over the federal budget. Until recently, the Social Security payroll tax brought in more money than went out in checks. That’s not true any more, and now government must find extra cash to fund the program. The gap will get wider as the boomers retire.

Adopting chained CPI would close only 23 percent of the funding gap. Next week, this column looks at other possible ways to keep Social Security solvent.