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Look for Chained CPI in Social Security Cuts

Although specifics have yet to officially emerge, there is little doubt that among the Social Security benefit cuts the President is proposing will be a reduction in Social Security’s annual cost-of-living adjustment (COLA) through an obscure change in the COLA formula known as the chained CPI.

Although specifics have yet to officially emerge, there is little doubt that among the Social Security benefit cuts the President is proposing will be a reduction in Social Security’s annual cost-of-living adjustment (COLA) through an obscure change in the COLA formula known as the chained CPI.

Update for those who haven’t seen it: The Washington Post reported last night that President Obama is “proposing significant reductions in Medicare spending and for the first time is offering to tackle the rising cost of Social Security,” in a meeting with top House and Senate leaders this morning. Apparently those cuts to Social Security and Medicare would be part of a $4 trillion debt reduction package—a larger deal than the $2 trillion one that had been talked about until this point.

There are a number of reasons why the Social Security cuts are sure to include the chained CPI. Chief among them is that it has been known for weeks now to be “on the table” in debt-ceiling negotiations. Here is Sen. Dick Durbin (D-IL) on June 29 in Tax Analysts:

“It's a possibility, but no decision's been made,” Senate Democratic Whip Richard J. Durbin of Illinois said of [the chained CPI’s] inclusion in the deficit reduction package being negotiated in conjunction with raising the debt ceiling.

Days earlier, on Dow Jones Newswire, Republican Majority Leader Eric Cantor (R-VA), refused to call the chained CPI a tax increase—though its effect on the tax code would be to increase revenue—effectively admitting that it was a policy Republicans could live with.

Asked whether the proposal would be interpreted as a tax increase and therefore a non-starter for Republicans, Cantor said it could be seen as both impacting tax rates and benefits paid out by the federal government.

Social Security advocates opposed to benefit cuts are already assuming the President will be proposing the chained CPI, and gearing up to fight it accordingly. In his response to the news that President Obama will push Social Security cuts, Eric Kingson, Co-Chair of the Strengthen Social Security Campaign, a coalition of over 300 national and state groups fighting Social Security benefit cuts, said that the chained CPI would violate the President’s previous promises.

“The President has said that cuts to Social Security benefits should not put current retirees at risk and that he will not slash benefits for tomorrow’s beneficiaries. These promises are being broken if, as has been reported, the President is considering Social Security COLA cuts. This would be done by changing the formula used to calculate the annual COLA to the so-called chained CPI,” Kingson said.

The Strengthen Social Security Campaign has also put up a webpage for resources and information on the chained CPI and its effects on benefits.

So, just what is the chained CPI, and what effect would it have on Social Security and other benefits?

The COLA is a benefit increase added at the end of every year to, as its name implies, adjust for increases in the cost-of-living, or price inflation. Currently the COLA for Social Security, as well as Veterans Affairs benefits, Supplemental Security Income, and federal employee pensions, is based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The chained CPI, as it is commonly known, is the Chained Consumer Price Index for Urban Consumers (C-CPI-U). It is a less generous formula for counting inflation, and thus would reduce the COLA beneficiaries receive. Specifically, the chained CPI grows at a slower rate because it assumes that as prices go up, consumers switch to cheaper products.

If implemented, the chained CPI would cut benefits more with each passing year. After ten years, average retiree benefits will be cut by about $600 a year, and after 20 years they will be cut by about $1,000 a year, according to Social Security Works’ analysis of the Chief Actuary’s estimates. And to get the savings in the next decade that politicians are surely seeking, the chained CPI would begin almost immediately—falling on current and future beneficiaries alike.

The chained CPI’s proponents argue that, since it accounts for the price substitution mentioned above, it is a more accurate measure of inflation.

Many Social Security advocates disagree, claiming that because health care costs make up a much larger share of seniors’ and disabled persons’ expenses—costs that cannot be easily substituted—the chained CPI is actually a less accurate measure of inflation for Social Security.

Further, they argue, even the CPI-W does not adequately account for seniors’ and disabled persons’ health care costs. They prefer the experimental Consumer Price Index for the Elderly (CPI-E), which weights health care costs more heavily. As a result, it rises faster than the CPI-W. From 1983 to 2007, the CPI-E has increased 126.5 percent, while the CPI-W rose just 110 percent.

The chained CPI is considered a measure that could earn bipartisan support, because if applied to the tax code, it would raise revenue by slowing the rate at which tax brackets increase.

The Congressional Budget Office estimates that the chained CPI would save $217 billion from 2012 to 2021. $145 billion, or two-thirds of those savings, would be from benefit reductions, and $112 billion, or 52 percent of those savings, would be from Social Security benefit reductions alone. (The National Academy of Social Insurance also has a great analysis of the effect of the chained CPI on the entire budget.)

Views expressed are those of the author, and do not reflect the views of Social Security Works or the Strengthen Social Security Campaign.