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
I never write to these things I usually just read the comments...and veiw others opinions...but this has gone to far. My parents are retirees...they are using thier meger retirement to help others in their community. I have personally met people that cannot afford heat AND food. Why are we further reducing the already low income of seniors ???
Just so the few millionares dont have to pay their fair share of taxes ??
...and the GOP says we cant tax the million and billionares because they are job creators ....So where are all the jobs ?
I thought SS was there to help with retirement ..and not be a source of profit/revenue ?
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.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market ended the holiday-shortened week on a mixed note as the Dow Jones Industrial Average shed 0.1%, while the S&P 500 added 0.1% with seven sectors posting gains.
Equity indices faced an uphill climb from the opening bell after disappointing quarterly results from Google (GOOG 536.10, -20.44) and IBM (IBM 190.04, -6.36) weighed on the early sentiment. Google reported earnings $0.15 below the Capital IQ consensus estimate on revenue of $15.42 ... More
More Market News
Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'