What is a Chained CPI? How Does It Affect Social Security?
Definition of modified consumer price index proposal.
The use of a chained CPI to determine increases (or decreases) in Social Security benefits appears to be on the table as part of the fiscal cliff negotiations for 2012 and 2013. While the normal consumer price index deals with the rise and fall in fixed items, a "chained CPI" would also address the choices that people may make as a result of facts on the ground. For example, higher prices for one kind of vegetable may make people seek out a lower priced substitute. When it comes to calculating costs for multibillion dollar programs like Social Security, a chained CPI could mean that benefit increases do not rise as quickly over time. Benefits, payments, and pensions that are adjusted with CPI calculations could all fare differently under chained CPI rules, and are expected to result in hundreds of billions of dollars in savings over time. When it comes to deficit negotiations, chained consumer price index calculations can create savings on paper, as well as deficit reduction, in ways that both the President and Congress could claim as victories for each side. For the average beneficiary, the change woud reduce benefits by one hundred and thirty dollars per year, but over a 30 year period there would be a 9 percent reduction compared to current benefits. As a measurement of inflation, chained CPI may be more accurate, but it is sure to make waves among recipients who live on very fixed incomes and who may regard $130 as a lot of money.
Notes and Special Information
Special note: In any negotiation, there are generally multiple proposals for entitlement programs, but a chained CPI may also be seen as an accounting trick or a way to cut increases in long term Social Security benefits.