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Give the chained CPI a try

By Jennie L. Phipps · Bankrate.com
Sunday, December 16, 2012
Posted: 6 am ET

No one wants to cut Social Security benefits now. And no one wants to add to the burden of future generations. But there is a potential retirement planning solution that anyone with children and grandchildren should consider.

One budget plan that is gaining support from both Republicans and Democrats is a change to the way we calculate the cost of living.

The National Council on Aging says that using the proposed formula, the  "chained consumer price index," or CPI, for calculating the annual cost of living adjustment, or COLA, would reduce annual benefits for a typical 65-year-old receiving Social Security and/or Supplemental Security Income by about $130 per year -- a little more than $10 a month.

As of October, Social Security says that about 62 million people are recipients of Social Security and SSI. Some basic math tells us that a little cut goes a long way. The bipartisan National Commission on Fiscal Responsibility and Reform, otherwise known as Simpson-Bowles, estimated that a chained CPI would save between $200 billion and $300 billion in 10 years by both reining in Social Security and raising taxes.

How does that work? It's pretty simple. The government tracks the rising cost of living by calculating the price of what it calls a "basket of goods." The goods are unchanging and don't take into account the reality that people switch to a competing product when prices rise. For instance, when name-brand soup hikes its price per can 25 cents, people buy the grocery brand instead. Supporters of a chained CPI want to factor in that reality when measuring inflation.

Chaining the CPI would cut Social Security spending by lowering the COLA, but it also would quietly raise taxes because the Internal Revenue Service tax brackets are pegged to the CPI. A chained CPI would push taxpayers into a higher tax bracket sooner where they would pay more.

Everybody feels a little bit of the pain, but who gets hurt the most? The Center for Retirement Research at Boston College says the chained CPI treats people living in retirement unfairly because it doesn't adequately reflect the rising cost of health care. It bases that on a report from the federal Consumer Expenditure Survey, which calculates that health care accounts for 13 percent of expenditures for those 65 and older, compared to only 5 percent for those younger than 65.

Otherwise, the Center for Retirement Research acknowledges that this plan is fairer than some because it allows current recipients of Social Security to contribute to the solution, and it doesn't put a heavy burden on the youngest taxpayers -- our children and grandchildren.

The center suggests taking it slowly, committing to this change temporarily, giving ourselves an opportunity to tweak it. If this would keep us from flying off the "fiscal cliff," it sounds like it is worth a shot.

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