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
Let's see.... when beef prices go up, consumers switch to chicken...
...and when chicken prices get too high, consumers will switch to peanut butter...
...and when peanut butter prices get too high, consumers will switch to dog food...
...and when dog food prices get too high, consumers will switch to eating.... dirt!
I see how this could work!
Our law makers get a pension for life the day the set down in office.
Their health plan is the best our money can buy.
We the people have to stand united and injure that our elected officials do what we want, if not remove them from office.
1). Put Social Security back into a trust fund, where it originally was, a number of years ago, Congress decided to move SS from trust into the General Fund so they could borrow from it.....and we all know, what congress borrows NEVER gets repaid.
2). Remove all those who have not paid into Social Security (except those who draw survivor's benefits). There are many programs that use the SS interest to provide for those who DID NOT PAY INTO THE SYSTEM...That interest belongs to the people who paid into SS, and no one else.
3). Stop the foreign aid payments to ALL countries, we should be using the money spent on foreign aid to take care of our own.
4). Cut congressional pay and benefits, stop the congresssional health plan, and make them use the same plans they force on the people.
5). Remove the ability for congress to set and vote on it's own pay and benefits, put that power back with the voting public.....We can't go to our bosses and tell themwe are taking a raise, why should congress tell us (after all they are supposed to work for us) they are taking a raise.
6). Cut the BS pork barrel spending, who cares about the effects of bovine **** gas on the environment, we can't stop cows from farting, so why spend millions to study cow farts? Too many stupid "research" projects like this get funded every year, to the tune of billions of dollars.
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