A central theme of the Gang of Six's deficit reduction crusade is lowering the annual cost of living for Social Security. They propose to change the formula so that the annual adjustment would be 0.3 percentage points lower than would otherwise be the case.
This cut will add up through time. After 10 years the reduction in benefits will be close to 3 percent. After 20 years it will be close to 6 percent and after 30 years, when beneficiaries are in their 90s, it will be close to 9 percent. A typical beneficiary gets close to $1,100 a month, so the Gang of Six would be taking close to $100 from their monthly check when they are in their 90s.
Since one third of retirees are almost completely dependent on Social Security, this will be felt. Anyone who questions the impact of such cuts should ask Speaker Boehner about a 9 percentage point increase in the top tax rate.
The rationale for the Gang of Six's Social Security cut is that the current inflation index doesn't take account of the fact that people can switch away from goods with rapidly rising prices to goods with slow rising prices. Research from the Bureau of Labor Statistics (BLS) shows that accounting for this switching would reduce the inflation rate by about 0.3 percentage points.
However, we know that the elderly have different consumption patterns than the population as a whole. They spend a larger share of their income on health care and less on computers and cell phones. BLS research shows that the rate of inflation experienced by the elderly is actually somewhat higher than the standard index used to adjust Social Security benefits. This research implies that if we are interested in an accurate cost of living adjustment, as the Gang of Six claim, then we might have to increase, rather than decrease, the annual adjustment.
The elderly cost of living index that shows they experience a higher rate of inflation is an experimental index, not a full price index like the other indexes calculated by BLS. However, it could be a full index if the Gang of Six and the rest of Congress wanted it to be. In other words, if the Gang of Six is really interested in a more accurate cost of living adjustment for Social Security, they can propose legislation that would direct BLS to construct a full elderly index. This would let them know whether it is necessary to raise, lower, or leave along the annual cost of living adjustment, to ensure that Social Security checks keep pace with the cost of living.
However the Gang of Six shows no interest in going this route. The only possible conclusion is that the Gang of Six is scared of what a full elderly index might show. In short, the gang of six is scared of the information. They obviously have made the decision to cut Social Security and they are not going to let evidence stand in the way.