As you may be aware the new budget deal may contain a shift in the use of which Consumer Price Index (CPI) is used for Social Security cost of living adjustments (COLAs).
OK, what the hell does that mean?
The CPI currently used by Social Security for COLA purposes is the CPI-W (Wage earners and clerical workers).
The CPI-W is based on the changes in price of a fixed quantity of goods but is limited to the group of households with at least 50% of the household income coming from clerical or wage paying jobs. This covers about 30% of the population.
CPI-U on the other hand uses the same data but only considers the prices paid for goods and services by those that live in urban areas. This covers about 80% of the population.
Unchained CPI-U (still All Urban Consumers) uses the same data but looks at the shift in where people are spending their money. Population coverage is the same as CPI-U.
Example of difference of unchained:
People stop buying product A because it is too expensive and start buying product B. In CPI-U the same quantities are used in both years to determine the change in prices to figure the index change. In C-CPI-U, the quantities change based on the new spending habits which affects the pricing used to calculate the index change.
To the best of my knowledge there is no C-CPI-W.
But what is the dollar impact to Social Security benefits? See below...
Here is a comparison of the two. I used the All Cities Annual Average for the comparison:
Year CPI-W C-CPI-U Diff
2000 3.5 2.0 -1.5 2001 2.6 2.3 -0.3 2002 1.4 1.2 -0.2 2003 2.1 2.1 0.0 2004 2.7 2.5 -0.2 2005 4.1 2.9 -1.2 2006 3.3 2.9 -0.4 2007 2.3 2.5 0.2 2008 5.8 3.7 -2.1 2009 0.0 -0.5 -0.5 2010 0.0 1.4 1.4 2011 3.6 2.8 -0.8
EDIT: Corrected CPI-W data (Table below unaffected)
So what is the bottom line?
The average retirement benefit for Social Security in 2012 is $14,844. Using this I calculated the impact to a retirement benefit of $10,900 starting in 1999 using the proposed C-CPI-U versus a CPI-W. Here are the numbers.
Year CPI-W C-CPI-U $Chg %Chg
1999 10,900 10,900 2000 11,282 11,118 -164 -1.4% 2001 11,575 11,369 -206 -1.8% 2002 11,737 11,510 -226 -1.9% 2003 11,983 11,750 -233 -1.9% 2004 12,307 12,045 -262 -2.1% 2005 12,811 12,393 -418 -3.3% 2006 13,234 12,753 -481 -3.6% 2007 13,539 13,075 -463 -3.4% 2008 14,324 13,563 -761 -5.3% 2009 14,324 13,500 -824 -5.8% 2010 14,324 13,692 -632 -4.4% 2011 14,840 14,077 -763 -5.1%
Totals 167,179 161,745 -5,434 -3.3%
The bottom line is that a SS retirement benefit beginning in 1999 using the C-CPI-U index for COLAs would have resulted in a benefit loss of $5,434 (-3.3%) from 1999 until 2011 versus the CPI-W index currently used.
I hope this helps. If any of you are more familiar with the numbers and find this comparison incorrect I am sure you will let me know and I thank you.
BTW, is there a way to insert table easily in a diary instead of simple text?
