The Danger of Using the “Chained” CPI to Calculate Benefits is Off the Table for Now
The debate to switch to a “Chained Consumer Price Index” (Chained CPI) to determine Social Security Cost-of-Living Adjustments (COLAs) has recently eased. According to the Center for Economic and Policy Research (www.cepr.net) using the Chained CPI will result in cuts to already modest Social Security benefits, not truly be an accurate measure of the inflation rate seen by seniors, and lead to income tax increases for working Americans.
Defining CPI-U (Chained CPI)
The Chained CPI is calculated by the Bureau of Labor Statistics (BLS) and is the Consumer Price Index (CPI) to gauge inflation by measuring changes in the prices of goods and services that Americans purchase each month (for more information please see www.bls.gov/cpi/cpisupqa.htm). The nickname for this CPI is CPI-U and it is often used for income tax calculations
Social Security claimants receive annual cost-of-living increases based on the Consumer Price Index for Urban Wage Earners and Clerical Workers. COLAs ensure that benefits keep up with inflation. For more information see www.ssa.gov/OACT/STATS/cpiw.html. The nickname for this CPI is CPI-W and it is often used to determine the annual change in Social Security and veterans benefits. .
How Chained CPI will Reduce Your Monthly Social Security Benefit
The Social Security Administration (SSA) estimates that the average annual benefit in 2013 was $15,528 (www.ssa.gov/pressoffice/basicfact.htm ). This modest benefit will take a direct hit if the SSA changes to the Chained CPI.
The CEPR calculates that if the SSA were to use the Chained CPI (see www.socialsecurity.gov/retirementpolicy/projections/summary.html for details) over time this would result in substantial cuts in benefits and a three percent benefit reduction after 10-years.