The Social Security proposal you need to know about
Lawmakers have suggested a switch to 'chained CPI' to reduce deficits. That could affect how the government calculates Social Security benefits in the future.
It sounds about as exciting as skim milk, but the phrase "chained CPI" could play a role in fiscal cliff negotiations -- and it could impact your Social Security payments.
Republicans are reportedly suggesting a shift to chained CPI as one way of dealing with the deficit, and President Obama appears open to the move. That could impact the way Social Security benefits are calculated in the future.
To understand chained CPI, it's important to get a refresher on the standard CPI, or the Consumer Price Index. This index tracks price changes of goods and services in some 200 categories. The Bureau of Labor Statistics defines the index as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."
The government uses the CPI as one basis for adjusting dollar values on Social Security payments. During times of inflation, for example, the index rises and Social Security payments get cost-of-living adjustments, or COLAs.
"Chained CPI" doesn't just look at the prices of goods and services. It goes deeper into consumer choices and relative price changes. For an example, says the BLS, consider differences in the costs of pork and beef.
If the price of pork goes up while the price of beef doesn't, shoppers might shift away from pork to beef, the Bureau notes. Chained CPI accounts for this type of consumer substitution, while the standard CPI does not.
And here's the important part: In this example, chained CPI would rise, but not by as much as the standard CPI. In fact, the Congressional Budget Office says the chained CPI has grown at a slower rate than the traditional CPI, by an average of 0.3 percentage points annually over the past 10 years.
So what does that mean to you, the taxpaying consumer? Switching to a chained CPI will reduce spending on Social Security and federal pensions while increasing revenue for the government. The differences between the CPI and chained CPI may seem small, but they can add up. As the Columbia Journalism Review points out, the chained CPI "cuts spending and raises revenue, the twin strategies for reducing the federal deficit."
There are estimates the chained CPI could bring in hundreds of billions of dollars in savings for the government while generating billions more in revenue. The unanswered question, though, is at what cost.
In a recent letter to Congress, the National Committee to Preserve Social Security and Medicare urged lawmakers to oppose any deficit reductions plans that would involve the chained CPI.
"This cut would reduce projected benefits for the oldest and most vulnerable Americans who would be least able to afford it," says the letter, which also notes that Social Security Administration officials estimate the chained CPI would bring about a 0.3 percentage drop compared to current cost-of-living adjustments.
"This reduced COLA would result in a decrease of about $130 per year (0.9%) in Social Security benefits for a typical 65 year old," The letter continues. "By the time that senior reaches age 95, the annual benefit cut will be almost $1,400, a 9.2% reduction from currently scheduled benefits. Remarkably, this is a benefit reduction that slightly exceeds the one month’s benefit for the average retiree."
The Christian Science Monitor says supporters of the chained CPI believe it’s a better way to measure inflation and reduce the deficit -- especially as a growing number of Baby Boomers retire and go on Social Security.
But there's also a middle ground in the debate, according to the Monitor: those who argue that the change "should be cushioned by supplementing benefits for older retirees."
More from Money Now
Cut your own wages and benefits or we will downsize your jobs in 2014.
Get rid of the money in politics. Nothing changes... nothing changes.
no big news to SOME of you, but if you spend $1.00 a SECOND for 31,600 years....you will pay off 1 (ONE) trillion. We are 19 trillion (and Growing) in debt. I guess all you idiots agree that taxing a few wealthy peop;le will fix it right up....idiots
So!!!! WHAT'S NEW. I is the same old CRAP, congress, the president,vp, none of them care
about 'THE OLD GOATES'.
Taking away Americans' rites' and taking security from people who are elderly and disabled!
is Just plain Cruel!, and robbery! all American Government Employees' get Holliday's off with pay! count the Government Holiday's! and then count the federal employee's that get a day off with pay! and add up how much money the Government gives' to its' employee's!, and also Rebuilding war zones'? Giving aid to Countries' that we feel sorry for! STOP! and Give it Back to the AMERICAN PEOPLE!
"SEND IN THE CLOWNS".
Where is AARP. They take my money every year, but we hear nothing about what they are doing to prevent us from being screwed. I paid in for 38 years
The Congress pay raises should be calculated the same way and they should drop their elite medical plan AND BE ON MEDICARE PLAN LIKE THE REST OF US. THEN I WILL AGREE WITH THIS.....DUH!!!!!!!!!!!!!!!!
As a non-ideologue Democrat (and I hope non-ideologue Republicans agree with me) I think a deal requires sacrifice from EVERYBODY - so, we keep Social Security, but we get rid of COLAs, and raise elgibilty age on those of us below Age 50 -
we do the same with Medicare -
we cut the Defense budget -
AND we raise the income tax rate to a reasonable level as we had during Clinton - we're not talking about becoming France, or even returning to the high top tax rates we had under Eisenhower, we're talking 3% - grow up and realize that the Bush Tax cuts, which everyone knew were a bad idea at the time (and that were made worse upon fighting two wars on China's dime) need to go away!
Just some more of the fascists in Washington making sure that they, wall street and corporate america advance their wealth at the expense of the rest of us.
Right now, if it wasn't for the RETIREES, our economy would be in BIGGER SHAMBLES than it already is! The golf courses would be bankrupting, the restaurants would be closing, the poor Republican OIL & FINANCIAL corporate MONARCHY with their 3x's too high priced gasoline prices would see a SHARP FALL IN USAGE BY THE RETIREES!
Political puppets have a way of forgetting the VERY PEOPLE THAT WORKED TO MAKE THEIR CORPORATE MONARCHY successful in the first place! Don't you think the RETIREES deserve to enjoy the REMAINDER of their lives after DONATING 20 PLUS YEARS to the corporate MONARCHY?????????????
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