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.

By Bruce Kennedy Dec 20, 2012 9:21AM

Image: Social Security cards on clothes line -- Mike Kemp/Tetra images/Getty ImagesIt 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

Dec 20, 2012 12:58PM
The three largest components of the CPI are housing, transportation and food & beverages.  

So, under chained CPI, some unnamed bureaucrat or bureaucracy can somewhat arbitrarily decide that more people are now renting than buying homes, now riding the bus rather than buying a car, and now drinking water instead of Pepsi.  

Look! . . . it's magic . . . poof . . . the chained CPI just went to 2% while the real CPI is actually at 5%.

Leave to our Federal government to look out for its self interest first and foremost.
Dec 20, 2012 12:54PM
Screw that ! This would allow them to stagnate your SS check even if all your food prices went up as long as Gruel is 11 cents a serving. What gas and home heating oil have gone up ? Walk and wear a sweater ! Cut the defense budget and Corporate welfare first. Stop spending billions on foreign aid and close all those Military bases around the world. Fire all our Ambassadors, with modern communications they are unnecessary. Stop paying politicians a pension, they are all rich anyway. And make them buy their own medical insurance if they are rich. There are thousands of ways to cut the budget without hurting our most vulnerable.   CUT WASTE DON'T BREAK PROMISES !
Dec 20, 2012 12:53PM
The first of many more broken promises.  Obama campaigned by attacking the "republicans for wanting to cut income to seniors"  Well, here we are barely over a month since election and where has the tide changed?
Dec 20, 2012 12:51PM
I agree, if Congress had years to deal with this , now they wanna pawn it back to the working class/slaves. They in turn should, be obligated to take pay decrease, until this great country is back on its feet again. Hey , it's only fair
Dec 20, 2012 12:47PM
what is wrong with congress. why don't you take a reduction in your pay and take my  health insurance. it is not easy being on social security benefits.  i don't think their is much else you can take.  but i'am sure you will find something.  oops maybe my blood.
Dec 20, 2012 12:44PM
This is how government lowers your standard of living.  Prices go up forcing you to by a cheaper alternative and then govenment lowers your COLA to keep you in that lower standard of living.  Government is insatiable in its greed for money.  That's why we need smaller government that steals less from us and allows us to raise our standard of living.  Too bad there are so many out there that don't realize that government taxation lowers your standard of living.
Dec 20, 2012 12:41PM

I'm so sick of hearing, don't cut SS!  These seniors, my mom included, receive so much more than was ever put in, it's almost criminal.  My mom's been collecting 20 years now and I estimate she's received 5 times, or more, than was ever put in for her.   She may live another 5-10 years on top of that.  There's no way that type of return could be guaranteed in this day and age through the market.

EVERYTHING the federal govt. spends money on needs to be frozen or reduced -WE DON'T HAVE THE MONEY!  WE CAN'T KEEP BORROWING 30-50% MORE THAN WE TAKE IN TAXES TO PAY ALL THESE BENEFITS!  I really don't know why people don't understand that!

Dec 20, 2012 12:40PM
The rich politicians don't have to worry about the price of medical care, prescriptions, or the cost of groceries. If they had to live on what people that depend on social security as thier only income have to live on, they would increase our COLA rather than cut it. The best way to save money in social security is to cut out all the people getting it that never paid into it in the first place, like illegal aliens, ect.
Dec 20, 2012 12:38PM

Congress has been using Social Security as a slush fund for years and now they keep screwing

with in one way or another. The benefits or Social Security and Medicare have been for the most

part, earned by Seniors. LEAVE IT ALONE!!  Being retired military, they are doing now everything

they possibly can to screw the retired military with possible cuts in benefits.


I say to HELL with all of the elected as they are morons.

Dec 20, 2012 12:37PM

Stop taxing our SS benefits. Why are we punished for wanting to or need to work after retirement when we worked all of our lives and paid into the system along with our employers only to have our SS benefits taxed because we exceed a taxable income level that is not only unfair, but takes a valuable new taxpayer out of the work force. Many retirees have the opportunity to work and put their valuable knowledge back in the work place. Further more, they pay income taxes, SS taxes and medicare taxes which by the way, are not used to pay our medicare payments. The money go's into the medicare pot and lost by the taxpayer. That's ok, but at least give us retirees a chance to live a little better. One answer is to raise the taxable amount to a reasonable figure.

 For anyone who is not familiar with this tax, this is how it works.  If you and your spouse have a taxable income of $32,000.00 or more, the Govt taxes your SS benefit up to 85% . This is why i quit working my part time job. Big brother doe's not want to let little brother get ahead. Ask the lawmakers of our great country to give something back to us and they turn a deaf ear. I don't know how many of you retirees need to work because of a relative who lives with you and cannot be claimed on your tax return or your health insurance is out of sight or whatever reason that the extra income helps to defray costs in your life, Please STOP the robbery of our SS benefits.                                 MARIO

                                               PITTSFIELD MA.

Dec 20, 2012 12:37PM
Yet another slight of hand by the feds. Many experts already note that the current CPI substantially underestimates inflation due to past adjustments. For example, if you buy a new computer, any change in price is also adjusted by the increased specs on your new computer. If your hard drive and CPU performance doubles, your getting twice the computer. The current CPI trys to take this into account. But try running any programs on that old IBM 8088, 2 megabyte hard drive computer, or better yet, Commodore or TRS-80?
Dec 20, 2012 12:36PM

"Unchained CPI"


Cash goes by... so quickly

so quickly when my COLA's gone


And bills get paid... so slowly

So slowly I could die


Without my Medicare and SSI

Just say goodbye.


I neeeeeed that dough

I neeeeed that dough.

but there it goes... so quickly out the door....

Dec 20, 2012 12:33PM
I say we put all legislators on Social Security and Medicare and take away their lavish salaries and pension and medical insurance plan.  That would save tax payers A LOT OF $$$$$$$$$$$$$$$!!!  They would not be so inclined to take from the ones that need it and have paid into it for 50+ years.
Dec 20, 2012 12:31PM
just have the government pay back what it has taken [stole] fom the ss  for their pet projects and every thing would be fine
Dec 20, 2012 12:30PM
They have been taking from the people and giving to themselves for the entire time they have existed, thats a given. SS should be the "bank" that handles all SS monies. This way all that money would be available for investments, the same way big banks do it.
Next, we need to reconfigure the criteria to qualify for welfare benefits. Put all the drunks and drug addicts on a three month limit. Either get your S*** together or pack a sleeping bag and find an alley. 
Force ALL welfare recipients to drug test every month for the next months benefits. This would have several benefits.:
1.) It will create jobs, someone has to do the tests and supervise those doing the tests.
Enlargement of existing facilities will be needed. This could be a good training ground for the rehabilitated druggies and drunks.

2.) By drug testing, we will reduce the number of babies being born addicted and in need of social supports all their lives.

3.) We will increase the number of  people more capable of raising well adjusted children. Hooray for this one!

4.)It will reduce the number of people defrauding the system and save millions of $$ by employing people instead of just giving them money.

5.) The ripple effect of more people off drugs and working will have a positive impact on our economy and grow the feeling of pride among families once again.

There are many things we can do as a country to positively impact how our country is managed .
Write to your congresspeople and write to our President. Share your good ideas, promote better management and step up and help STOP the mismanagement of our government.

We can do it!
Dec 20, 2012 12:28PM

Unless something is done, SS will be broke by 2030.  This is not even in dispute anymore.


We need to get younger people into the work faster to pay for what has been nothing but a Ponzi scheme from the beginning.  Everything else is an accounting gimmick.

Dec 20, 2012 12:28PM
Why don't they just collect the back taxes owned by these elected officials and warren buffet
Dec 20, 2012 12:24PM
Hang them ..
Hang them all
Greedy politicians

Dec 20, 2012 12:23PM
Just great all parties are behind placing the burden of debt reduction on the shoulders of elderly on soc. sec., even though they have paid into the fund and are just getting their money back!!  If the govt had not(and still are) robbed the fund for last 20+ years of its citizens contrbutions and the funds investment gains, the needed funds would still be available!!!!  The govt and its finacial dept's are far bigger crooks than Madoff ever could be.
Dec 20, 2012 12:22PM
The liberals have said they will not touch Social Security so how would his change to the CPI ever pass without leadership by Obama??
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