Why the Chained CPI Is Bad Policy

You’ve probably been hearing a lot about the Consumer Price Index. The terms “CPI” and “chained CPI” ricocheted around the fiscal cliff talks last year. And now they’re being debated as a solution to the next round of deficit reduction negotiations that are getting under way.

Confused? Never fear, here’s what you need to know:

What is the CPI?
According to the Bureau of Labor Statistics, it’s “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” In other words, it tracks the prices of household expenditures like groceries, medical bills and clothing. CPI is often referred to as a cost-of-living index.

What does it have to do with Social Security?
Social Security benefits are based on changes in the CPI. Better known as the “cost of living adjustment,” or COLA, it makes sure benefits aren’t eaten away by inflation. So when prices of goods aren’t rising, Social Security benefits stay the same. When inflation hits, benefits can adapt to keep pace.

So what’s this “chained CPI” that everyone is talking about?
It’s an alternative method of calculating cost of living adjustments, taking into account how people spend money. The chained CPI assumes that when the price of one good skyrockets, people are more likely to buy a similar, cheaper version of that good. When the price of apples goes up, for instance, you might buy oranges instead. Shoppers might grab the generic boxed cereal when the name-brand variety gets too expensive.

Does a chained CPI also affect Social Security benefits?
Yes! The chained CPI essentially slows the growth in cost-of-living adjustments. That means smaller Social Security benefits for older seniors who depend on it for their income. Today the current system already doesn’t meet the needs for many on fixed incomes. Seniors and people with disabilities, both of whom pay a hefty price for health care, can’t really substitute cheaper products. Switching over to a chained CPI would be disastrous.

Can you break that down?
For the average worker retiring at age 65, the chained CPI would cut benefits by $653 a year at age 75 and almost $1,139 a year at age 85. By age 95, when Social Security benefits are probably needed the most, that worker faces a whopping $1,611 a year cut, or 9.2 percent.

Wow! Does it hit veterans too?
Yes! VA benefits, like Social Security benefits, are determined by COLA. Under the chained CPI, a disabled veteran who started receiving VA disability benefits at age 30 would have his benefits reduced by $1,425 at age 45, $2,341 at age 55 and $3,231 at age 65.

This sounds like a pretty bad deal.
Absolutely.

What can I do?
We’re calling on elected officials to oppose benefit cuts to Social Security, Medicare or Medicaid, and close loopholes for Wall Street and the richest 2 percent of Americans. We’re telling them that any further deficit reduction should NOT come from budget cuts that threaten the 98 percent.