Tuesday, December 18, 2012

A chained CPI could hit seniors who live a long time; more on the Supreme Court and on the "Ponzi" idea


Ed O’Keefe and Dylan Matthews, in an article Monday December 17, 2012, explain (in the Washington Post)  how switching the inflation adjustment formula on Social Security to a “Chained CPI” (or “Chained Consumer Price Index” could affect beneficiaries.  Over time, a typical beneficiary could see his or her beneficiary check be about 5% less than it would have been in about ten years.  This could add up for beneficiaries who live a long time.  President Obama has proposed compensating with a slight step-up at age 85.  The Chained CPI reduces inflation rate by assuming people tend to buy generic brands over time as major brand prices increase, or will migrate to cheaper but similar products (probably not to pigs' knuckles).

The link for the story is here.

 There is more to say the recent discussions of an old Supreme Court ruling that denies a property right to FICA contributions.  When people and employer pay FICA (or self-employment) taxes, the government uses the taxes collected to pay current beneficiaries, and has (when there was a surplus) lent it to other governmental operations.  When new people retire and the government starts paying them benefits, it must, in a Ponzi-like chain letter, “borrow” from current workers to keep making payments.  People are living longer, and for a variety of cultural reasons, not having as many children to provide workers to “loan” the money, although immigration has, until just recently, made up for some of the gap.  In a situation where the debt ceiling is exceeded, there could a  legal case that in fact social security benefits might not be paid (at least those with other means).  I would like to see Congress hire an insurance annuity contractor (like Vantage) to make the actuarial calculations and carve out a legal property right for some of the benefits based on actuarial math.  

When people make FICA contributions and expect to be paid back in their own retirement, there's another part of the deal that we miss:  providing another generation that is capable of paying us back!

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