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Chained CPI worth considering

By Jennie L. Phipps · Bankrate.com
Monday, April 8, 2013
Posted: 3 pm ET

President Barack Obama is expected to include a change to the way the cost of living is calculated for Social Security when he introduces a new budget proposal this week.

The proposal has brought defenders of Social Security out in droves. A survey released by AARP says that 84 percent of voters age 50 and older oppose reducing Social Security benefits in any way to reduce the deficit.

Social Security cost-of-living allowances are pegged to a consumer price index called the CPI-W (the "W" is for workers and was designed to mirror changes in their cost of living). Checks are adjusted regularly to reflect increases in that index.

The Bureau of Labor Statistics also calculates two other inflation indexes: the CPI-U, to which the tax code is linked, and the chained CPI, which many consider a more accurate measure of inflation because it reflects shopping behavior. For instance, when the price of oranges rises, people eat more apples.

Obama is apparently about to propose adopting the chained CPI for broader use -- as a measure to drive the tax code as well as increases in military and federal pension benefits.

The Center for Economic and Policy Research calculates that switching to the chained CPI would reduce cost-of-living adjustments -- an important retirement planning factor -- by about 0.3 percentage points a year through 2085 and reduce the program's 75-year deficit by about one-quarter. For someone receiving Social Security or other government retirement benefits for 20 years, using the chained CPI would result in an average cut in benefits of about 6 percent over that time period, according to the center.

If the chained CPI also were used to adjust federal income tax brackets, it would raise the bracket amounts more slowly, so taxpayers with pay increases would move into higher brackets more quickly -- paying higher taxes sooner. This would affect not only working people but also more affluent people living in retirement.

AARP's survey suggests that opposition to this change is widespread:

  • Some 66 percent of voters 50 and older say they would view their congressional delegates less favorably if they voted for a chained CPI.
  • About 87 percent of voters 50 and older oppose reducing benefits for today's recipients of Social Security.
  • Most voters 50 and older  -- 85 percent of Democrats, 83 percent of Republicans and 82 percent of Independents -- believe that the future of Social Security should be considered separately from the budget deficit talks.

The sentiment that Social Security should be considered separately from the rest of the budget deficit is understandable, but it doesn't reflect the reality that it's going to take more money to pay Social Security's commitments than the government is likely to get from payroll taxes. Burdening our children with increased debt to support the boomer generation is clearly wrong.

The chained CPI may not be the answer, but it is a way that shares the pain more evenly -- and that makes it worth considering.

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