Oct 30, 2011
To correct the problem of over-indexation, many have proposed switching to the chained CPI to provide a more accurate measure of inflation for indexed provisions in the federal budget. This switch was recommended by the National Commission on Fiscal Responsibility and Reform (“FiscalCommission”) and the Bipartisan Policy Center’s Debt Reduction Task Force (“Domenici-Rivlin”). It has been incorporated into a large number of other plans, including from the Heritage Foundation on the right and the Center for American Progress on the left. An overwhelming majority of economists from both parties agree that the chained CPI is afar more accurate measure of inflation than the CPI measurements currently in use. In addition to improving technical accuracy,switching to chained CPI would have the secondary benefit of reduce the deficit – by about $300 billion over the next decade alone.Addressing our fiscal challenges will require many tough choices and policy changes – but switching to the chained CPI represents neither. Such a change offers policymakers the rare opportunity to achieve significant savings spread across the entire budget by making a technical improvement to existing policies. As such, across-the-board adoption of the chained CPI should be at the top of the list for any deficit reduction plan or down payment. Read more: http://crfb.org/document/measuring-case-chained-cpi
December 18, 2012 AARP to Congress and the President: Don’t Cut Social Security Association urges Congress not to include a cut via Chained CPI in budget deal. Washington, DC – AARP Executive Vice President Nancy LeaMond today reiterated the Association’s opposition to including a cut to the benefits of current and future Social Security recipients as part of a year-end budget deal via a formula change known as Chained CPI. She offered the following statement: “Adopting the chained consumer price index for Social Security benefits will take $112 billion out of the pockets of current Social Security beneficiaries in the next 10 years alone, and is neither fair nor warranted. “Social Security is currently the principal source of income for nearly two-thirds of older American households, and roughly one third of those households depend on Social Security for nearly all of their income. Half of those 65 and older have annual incomes below $18,500. Every dollar of the average Social Security retirement benefit of about $14,800 is absolutely critical to the typical beneficiary. “The Chained CPI is a stealth benefit reduction that will compound over time and cut thousands of dollars in retirement income for current beneficiaries. A typical 80-year-old woman will lose the equivalent of 3 months worth of food annually. The greatest impact of Chained CPI would fall on the oldest, eventually resulting in a cut of one full month’s benefit annually. This dramatic benefit cut would push thousands more into poverty and result in increased economic hardship for those trying desperately to keep up with rising prices.”
Social Security benefits are adjusted annually to account for inflation—when the cost of living increases, benefits automatically increase so that their purchasing power does not erode over time. Shifting to the chained CPI would mean a cut in Social Security benefits for current and future beneficiaries, compared to the benefits they would receive under the current COLA.The cut would grow deeper the longer an individual received benefits, making this cut especially painful for women who have longer life expectancies, rely more on income from Social Security, and are already more economically vulnerable than men. Shifting to the chained CPI has been justified on the grounds that this is a technical change to a more accurate way of measuring changes in the cost of living. However, the chained CPI is not a more accurate way of measuring changes in the cost of living for Social Security beneficiaries whose current cost-of-living adjustments, if anything, are too low. http://www.nwlc.org/sites/default/files/pdfs/cuttingsocseccolafinalreportjune2011.pdf
The proposal to move to a "chained" Consumer Price Index (CPI) for making cost-of-living adjustments (COLAs) to Social Security benefits and indexing income tax is under discussion as part of the debt reduction talks to increase the debt ceiling. This proposal will reduce benefits for current and future retirees, while increasing their taxes. Background When automatic COLAs for Social Security benefits were enacted in the 1970's, there was only one CPI index available for use - the CPI-W, which reflects price increases for urban wage earners and clerical workers, based on a fixed market basket of goods and services. The purpose of the COLA is to offset the Social Security beneficiary's additional expenses from one year to the next resulting from inflation. Beginning in 2000, a new index became available - the chained CPI-U. This index is updated to reflect changes in spending patterns as prices increase on a month-by-month basis, as opposed to every two years in earlier indices. For example, if the price of apples increases while the price of bananas remains constant and consumers respond by buying fewer apples and more bananas, the current index does not fully account for the substitution, while a chained-CPI-U does. However, not all the "substitutions" are this simple - for example, consumers forced to spend more on fuel, may spend less on food - so that the ability of some groups, such as seniors with health care expenses, to adjust and make substitutions becomes questionable. In contrast to the chained CPI-U, the CPI-E was developed in 1982 to reflect the different spending patterns of consumers age 62 and older. The CPI-E has reflected a rate 0.3 percentage points higher than inflation as measured under the current method. This is primarily attributable to the greater weight placed on health expenditures in this index, reflecting the continued rise in health care costs at a faster rate than other expenses. Seniors, of course, devote a higher percentage of their monthly spending to health care costs, and rarely have the flexibility to substitute one medication or particular medical procedure for a less costly alternative. Finally, while the CPI-W and the CPI-E are updated annually, the chained CPI-U does not become final until two years after it is first published. Obviously, there are technical implications with using an initial number that could be revised two years later, or waiting two years for a final number before applying a COLA. How will the change affect seniors? Replacing the current CPI-W with the chained-CPI-U for purposes of calculating the Social Security COLA will reduce benefits for current and future beneficiaries. The chained-CPI-U produces lower estimates of inflation than the current CPI does, averaging about 0.3 percentage points lower than the increases in the current CPI since December 2000. The Chief Actuary of the Social Security Administration estimates that this reduced COLA would result in a decrease of about $130 per year (0.9 percent) in benefits for a typical 65 year-old. By the time that senior reaches 95, the annual benefit cut will be almost $1400, a 9.2 percent reduction from currently scheduled benefits. The cumulative effect of these reductions means that the disproportionate impact will be felt by Social Security's oldest beneficiaries. These are often women who have outlived their other sources of income, and rely on Social Security as their only lifeline to financial stability. Younger beneficiaries, who have sources of income other than Social Security, may find themselves hit from another direction as well - increased taxes. Moving to a chained CPI for purposes of indexing the income tax would reduce the yearly adjustments for personal exemptions, the standard deduction, and income thresholds dividing the tax brackets, thereby increasing the amount of taxes owed. A recent Joint Committee on Taxation report prepared for Congress states that these increases would fall mainly on lower and middle-income taxpayers. For example, the tax liability for those with incomes between $10,000 and $20,000 would increase by 14.5 percent, and 3.5 percent for incomes between $20,000 and $30,000, while those with incomes of $1 million and above would see an increase of only 0.1 percent. NATIONAL COMMITTEE POSITION The National Committee opposes use of the chained CPI-U for calculating Social Security COLAs. This is a benefit cut for current and future beneficiaries, pure and simple. Any discussion of Social Security should be off the table in debt reduction discussions. Social Security did not cause the nation's debt problems and Social Security beneficiaries, who worked all their lives and paid into the system, should not be expected to pay for the nation's fiscal mistakes. If the true reason for a change in the Social Security COLA calculation is to reflect changes in the cost of living more accurately, and not simply to reduce the nation's debt, the CPI-E represents a more accurate alternative for seniors. A COLA based on the CPI-E would ensure that seniors' buying power does not erode over time. If policymakers are concerned that the index does not account for substitution accurately, a chained CPI-E should be developed. There is no question that the nation's debt problem must be addressed, but Social Security beneficiaries should not be asked to bear the burden of solving this problem when Social Security, with its self-financing framework, has not contributed to this situation. http://www.ncpssm.org/news/archive/vp_cola_changes/
Recently, the media has reported that some Washington politicians are prepared to permanently cut the Social Security COLA (Cost of Living Adjustment) as part of the debt ceiling negotiations. This is despite the fact that Social Security is an independent, "off-budget" program with its own dedicated revenue source that has never contributed a single penny to the national deficit. This benefit cut is called the chained CPI-U. It is being presented as a minor technical change, but it would slash benefits of all beneficiaries, including current retirees, disabled workers, orphans and others. This proposed cut is a threat to the financial security of every American who relies, or will rely, on Social Security. Currently, the Social Security COLA is calculated using the CPI-W. This measures the inflation experienced by urban wage earners and clerical workers, about a third of the overall American population. Since 1999, the CPI-W has accounted for consumer substitution of goods within the same category. This means the current COLA already reflects consumers? preference in buying fewer items rising in price versus cheaper alternatives (for example, buying Pepsi if the price of Coke goes up). Opponents of Social Security would like to replace the CPI-W with a new measurement known as the chained CPI-U. The (unchained) CPI-U was created in 1978 and is currently used to index personal income tax brackets and poverty thresholds. The chained CPI-U adds additional measurements based on the premise that when costs of certain products go up, people will substitute by buying a dissimilar good. For example, if the price of food rises and the price of gasoline decreases, it assumes people will buy less food and more fuel. Unfortunately, because the chained CPI-U requires extensive data collection on changing spending patterns, it is not available until about two years after the end of the measurement period. Read more: http://latinosforasecureretirement.org/resources/reports/LSR_Chained_CPI_Policy_Brief.pdf
According to multiple sources, Members of Congress on the Super Committee charged with reducing the nation’s budget deficit are considering changing the formula that determines the Cost of Living Adjustment (COLA) for future Social Security recipients. Social Security’s COLAs for monthly benefits are designed to help retirees keep up with rising living standards and costs. COLAs currently are tied to the Consumer Price Index for Urban Wage Earners (CPI-W), which surveys price changes in the average set of goods purchased by urban wage earners and clerical workers. There has been no COLA in the past two years. The CPI-W formula does not protect seniors’ purchasing power because it fails to account for the fact that seniors spend two to three times as much of their budget on medical care than younger households. Yet, many in Congress are seriously considering cutting Social Security benefits by now tying the COLA to the Chained CPI (C-CPI-U), an even smaller measure of inflation. While many will falsely describe this change as simply technical, it is a change that would result in big lifetime losses in benefits for the average Social Security beneficiary. According to Social Security Works, an average earner retiring in 2011 at age 65 would lose over $6,000 over 15 years if the chained CPI were adopted today. The chained CPI assumes that a lower COLA is acceptable because consumers can substitute cheaper products when prices go up. The problem is that health care costs, which consume a large amount of seniors’ income, cannot simply be substituted with a cheaper version. A senior cannot just substitute triple bypass surgery with a double because it’s cheaper. Nor can knee surgery be substituted with crutches. http://www.retiredamericans.org/newsroom/view/2011-10-super-committee-could-cut-social-security-colas-with
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Ties cost of living determinations for federal benefits and taxes to the Bureau of Labor Statistics' "chained" Consumer Price Index, which grows more slowly than the standard CPI, reducing the federal deficit by $299 billion over ten years.
This is a proposal by the Bowles-Simpson Commission that was originally considered by the Super Committee and is reportedly under consideration during the "Fiscal Cliff" talks. (Source: Bowles-Simpson Commission and House Republicans.)