As Congress struggles with ways to reduce the federal deficit, one of the approaches that appears to be among the most likely to be adopted is a revision in the way the Consumer Price Index is calculated.
The CPI measures how much the cost of the things people buy is affected by inflation. The chained CPI, which the Bureau of Labor Statistics has calculated in addition to the classic CPI over the last few years, takes into account the lifestyle changes we make when the price of something rises. For instance, if the cost of oranges goes up, a lot of us switch to buying something cheaper, like apples. The chained CPI acknowledges that and factors it into the calculation, producing a lower cost-of-living adjustment, or COLA.
The classic CPI is used to measure the cost-of-living adjustments for Social Security recipients. If Social Security is required to adopt the chained CPI instead, cost-of-living increases to Social Security will be lower, a factor for anyone doing retirement planning.
The Senior Citizens League, a nonpartisan advocacy group, is among those already lobbying against this proposal. The Senior Citizens League contends that the chained CPI doesn't take into account costs that affect people living in retirement. For instance, when the cost of medicine goes up, most older people can't switch to a cheaper brand. It just doesn't work that way.
Switching to the chained CPI would reduce Social Security COLAs by about 0.3 of a percentage point each year, the Congressional Budget Office estimates, saving the federal government more than $200 billion over the next 10 years. Most of the savings would come from lower Social Security benefits and lower retirement benefits for federal employees, whose increases also are tied to the CPI
The Senior Citizens League calculates that such a change would reduce Social Security benefits by an estimated 7 percent over a 25-year retirement. For a senior who retires in 2011 and receives the average Social Security benefit -- about $1,100 per month -- this would reduce benefits over 25 years by $18,634. The cuts would be very small in the beginning but escalate as recipients age.
Supporters of the "chained" CPI plan propose it also would increase the Social Security minimum benefit so the poorest Social Security recipients wouldn't be as affected. Nevertheless, it's clear that people who are living on nothing besides Social Security -- about 25 percent of recipients -- would feel the pinch.