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Chained-CPI: What it is and how it affects your benefits

On April 10, President Obama released his proposed budget, which included cuts to more than $1 trillion in spending on governmental programs, in addition to almost $800 billion in newly proposed taxes.

But there was also mention of a term that caught the attention of many: chained-CPI.

Chained-CPI stands for Chained Consumer Price Index for All Urban Consumers, and can be seen by some as a proposed cut to Social Security benefits. According to the Washington Post, chained-CPI is a way to index spending--including Social Security benefits--to the rise of prices over time.

Currently, Social Security benefits are being calculated on a different index. Over time, benefits increase to cover the increase in the cost of living. Under the proposal, benefits calculated using chained-CPI would increase at a rate that is slower than the current index. The rise would be slower because, under chained-CPI, there would be a reflection of "substitutions" that consumers might make as a response to the price of things.

For example, if the cost of a specific form of transportation rises, chained-CPI would factor in the assumption that some people would switch to a more affordable form of transportation, thus spending less money. But, those receiving Social Security disability or retirement benefits are already at a disadvantage and this change would be unfair to those who might not be able to make substitutions or adjustments to save money.

The proposed change would not actually cut Social Security benefits; Cost of Living Adjustments (COLA) would continue to be made, just as a slower rate. Individuals receiving Social Security Disability and Supplemental Security Income benefits would not see a decrease in their current payments. However, future COLA benefit increase would be smaller than those under the current index. 

Even if the changes appear to be minimal, they could potentially have a negative impact on those receiving Social Security disability benefits or retirement benefits. According to the AARP, "Oldest Americans are the least able to absorb cuts to their benefits as they are more reliant on Social Security for their income and have higher out-of-pocket medical spending and a higher poverty rate than younger Americans."  And, younger individuals receiving disability benefits could see even larger cuts to their benefits as time goes on.

 

Sources: The Washington Post, "The ins and outs of 'chained CPI' explained," by Sean Sullivan, April 10, 2013.

AARP, "Proposed Changes to Social Security's Cost-of-Living Adjustment: What Would They Mean for Beneficiaries?," by Gary Koenig and Mikki Waid, October 2012

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