Friday, February 14, 2014

Estimates of the lifetime dollar benefit reduction from a change in the Social Security COLA.

Question: What is the potential annual impact and cumulative dollar impact of a policy change that links Social Security benefits to the chained CPI rather than the traditional CPI?


Assumptions:

Analysis presented here pertains to a single retiree who retires at age 62 with a $1,250 per month Social Security retirement benefit.

The traditional CPI grows at 2.42% per year.  The chained CPI grows at 2.09% per year.     These statistics were based on BLS data over the 1999 to 2013 time period.  Economists at the Bureau of Labor Statistics at the Department of Labor informed me that they did not have data on the chained CPI for years prior to 1999.

See the link below for statistics on the traditional and chained CPI.



Analysis:  Information on the growth of the annual Social Security Benefits adjusted for the traditional CPI and adjusted for the chained CPI is presented for a retirement potentially spanning from age 62 to age 100 is presented in the table below.

In this table, the first column is age, the second column is the Social Security benefit adjusted by the traditional CPI, the third column is the Social Security benefit adjusted for the chained CPI, and the fourth column is the cumulative change in the Social Security benefit due to the adjustment process.


Path of Social Security Benefit With adjustment based on the traditional CPI
Path of Social Security Benefits with Adjustment based on the chained CPI
Reduction in Benefits for Age Due to Switch from Traditional to Chained CPI
Cumulative Reduction in Benefits
$15,000
$15,000
$0
$0
$15,363
$15,313.50
$50
$50
$15,735
$15,633.55
$101
$151
$16,116
$15,960.29
$155
$306
$16,506
$16,293.86
$212
$518
$16,905
$16,634.41
$271
$788
$17,314
$16,982.06
$332
$1,120
$17,733
$17,336.99
$396
$1,516
$18,162
$17,699.33
$463
$1,979
$18,602
$18,069.25
$533
$2,512
$19,052
$18,446.90
$605
$3,117
$19,513
$18,832.44
$681
$3,797
$19,985
$19,226.03
$759
$4,557
$20,469
$19,627.86
$841
$5,398
$20,964
$20,038.08
$926
$6,324
$21,472
$20,456.88
$1,015
$7,338
$21,991
$20,884.42
$1,107
$8,445
$22,523
$21,320.91
$1,202
$9,647
$23,068
$21,766.52
$1,302
$10,949
$23,627
$22,221.44
$1,405
$12,355
$24,198
$22,685.86
$1,513
$13,867
$24,784
$23,160.00
$1,624
$15,491
$25,384
$23,644.04
$1,740
$17,231
$25,998
$24,138.20
$1,860
$19,091
$26,627
$24,642.69
$1,985
$21,075
$27,272
$25,157.72
$2,114
$23,189
$27,932
$25,683.52
$2,248
$25,437
$28,608
$26,220.31
$2,387
$27,824
$29,300
$26,768.31
$2,532
$30,356
$30,009
$27,327.77
$2,681
$33,037
$30,735
$27,898.92
$2,836
$35,873
$31,479
$28,482.01
$2,997
$38,870
$32,241
$29,077.28
$3,163
$42,033
$33,021
$29,685.00
$3,336
$45,369
$33,820
$30,305.41
$3,515
$48,884
$34,638
$30,938.79
$3,700
$52,583
$35,477
$31,585.42
$3,891
$56,475
$36,335
$32,245.55
$4,090
$60,564
$37,215
$32,919.48
$4,295
$64,859


Some observations:

  • The annual impact of the change from the traditional to chained CPI grows over time.  

  •  The annual impact is $463, at age 70 $1,302 at age 80 at age 80, $2,532 at age 90, and $4,294 at age 100.

  • The cumulative impact of the change in the COLA formula is $1,979 at age 70,  $10,949 at age 80, $30,356 age 90, and $64,859 at age 100.



Some Implications:

  • The change from a traditional to chained CPI would have a very large impact both on household and national finances. 


  • The fiscal impact of the change in the COLA formula would grow for 38 years until it reaches a constant rate.   (After 38 years the new COLA fully impacts all retirees based on their age.)


  • The change phases in slowly which gives people time to respond and change spending patterns.


  • The annual and cumulative impacts are largest for people near the end of their life when expenses both from increased medical needs and a need to change living arrangements are largest.


You may be interested in my policy blog on the Social Security COLA.



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