Secure your future

Competing COLA formula for Social Security would cost seniors

PENSION CLINICS

Due to Hurricane Sandy, Part 2 of the UFT pension clinic for members in Tiers III/IV was postponed on Nov. 2. It will take place instead on Friday, Dec. 14, at the original sites in Brooklyn and Staten Island.

These popular pension clinics — a mini-course in pensions and related retirement matters — will continue with winter clinics in Manhattan and spring clinics in the Bronx and Queens.

Go to the Pension Clinic page for the full schedule >>

The union urges all members to participate in these clinics two or three years before retirement. The clinics are only one part of the UFT’s many services devoted to helping members prepare for a financially secure retirement.

To be fully informed, members should attend both parts of each series.

The Social Security cost-of-living adjustment currently is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is produced by the Bureau of Labor Statistics. However, there is a movement afoot to change to a different CPI formula, at least one of which would prove costly to seniors.

The current Social Security COLA, which is intended to protect the purchasing power of benefits against erosion by inflation, was enacted in 1972. At that time, the bureau produced only a single CPI and that CPI-W is still used as the basis for determining the Social Security COLA today.

We reported in the last issue that the Social Security COLA for 2012 beginning in January 2013 would be 1.7 percent. This compares with a 3.6 percent increase for 2011 and no increase at all in 2009 and 2010.

Other CPI formulas have since been developed. One of these is called the CPI-E. It is an experimental index that reflects the spending patterns of those age 62 and older (those eligible for Social Security).

Another is the chained CPI. This index reflects the extent to which consumers make changes in their purchasing patterns across dissimilar categories of items, such as spending more on fuel and less on food, in response to relative price changes. It is estimated that the chained CPI would reduce the COLA for recipients by about 0.3 percent per year.

Several proposals since November 2010, including the Bowles-Simpson Fiscal Commission’s report, have recommended shifting to the chained CPI. Proponents favor a chained CPI because it will lower Social Security outlays.

The chief actuary of Social Security estimates that the chained CPI would produce a monthly benefit that is about 8.4 percent lower by the time a retiree reaches age 92. There would be a similar effect on disability beneficiaries. It would reduce Social Security expenditures on benefits over the next 75 years by 0.5 percent of taxable payroll, about one fourth of Social Security’s long-term shortfall.

Those who believe that a chained CPI would more accurately measure elders’ living costs are absolutely wrong. The elderly on average have lower incomes and about 27 percent lower expenditures than other households. More purchases are for necessities. No evidence exists that documents whether seniors are able to lessen the impact of price increases by shifting purchases across dissimilar categories.

As a matter of fact, advocates for Social Security recipients point to three bills introduced in Congress for using a special index for calculating the CPI for older Americans. Why? Households headed by an individual 65 or older spend two to three times as much of their budgets on medical care as younger households do. Disabled Social Security recipients spend an even larger amount on health care than do the elderly.

It is critically important that benefits keep up with the cost of living because other sources of income decline with age. Savings are used up. Death of a spouse reduces income. Social Security makes up for an even greater share of the elderly’s income.

The current CPI that is used to determine Social Security COLA undercompensates out-of-pocket health expenses. The chained CPI would even further undercompensate them.

The experimental CPI-E for the elderly comes closer to reflecting the cost of living for the elderly because it weighs health care expenses more than the other CPIs do. This experimental CPI-E should be further refined to produce an improved CPI for the elderly that closely tracks more accurately changes in their cost of living.

The chief actuary of Social Security estimates that the CPI-E will rise about 0.2 percent points faster than the currently used CPI. This would yield a monthly benefit that is about 6 percent higher by the time a retiree reaches age 92. It would increase Social Security expenditures over the next 75 years of taxable payroll by about 0.34 percent of the program’s long-term shortfall.

TRS reminders

  • Do you have up-to-date Designation of Beneficiary Forms on file at the TRS?
  • You should have received your 2012 Annual Benefit Statement by now. If not, contact the TRS.
  • In-service participants in the Tax-Deferred Annuity program and retirees with deferred TDAs have until the end of November to request any change in investment elections
VARIABLE ANNUITY
The unit value is computed during the latter part of each month. Recent values are:
  VARIABLE
  A
Diversified Equity
B
Bond
C
International Equity
D
Inflation Protection
E
Socially Responsive
September 60.744 19.234 8.621 11.225 10.443
October 62.048 19.196 8.843 11.439 10.543
November 61.110 19.131 8.868 11.418 10.365
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