By Robert Rosenblatt
Chained CPI in Lay Terms
The AARP website has a simple explanation of Chained CPI (Consumer Price Index): It is a way of measuring living costs by assuming that when prices for one thing go up, people sometimes settle for cheaper substitutes (i.e., if the cost of beef skyrockets, some people will buy chicken).
In the end, cost-of-living adjustments with Chained CPI would be lower than they would with regular CPI. Depending upon which formula is used, the amount of your Social Security payments could change over time.
Depending upon your point of view, the chained CPI is either a technical fix to the Social Security cost-of-living formula, or a dastardly plot to slash future benefits of some of the oldest and most vulnerable of Social Security beneficiaries.
The argument is becoming real these days, entangled in the fierce debate over the federal government shutdown and the impending disaster of a default on the national debt.
Advocates and defenders of Social Security are nervous that President Obama and the Democrats in Congress might accept the chained CPI as part of a grand bargain to end the political stalemate.
This is what frightens them: adopting the chained CPI could slash $31.4 billion from the nation’s economic output over the next decade, and wipe out 204,000 jobs, according to a recent report by the National Committee to Preserve Social Security and Medicare Foundation. The foundation report was prepared in consultation with Dean Baker, co-director of the Center for Economic and Policy Research.
The report applies the impact of the chained CPI to each congressional district and projects significant problems for areas with large populations of people receiving government payments. In Florida’s 16th district, which covers Sarasota and other Gulf Coast cities, the benefit cuts would reach $87.7 million by 2023. The loss in economic output would be $127.2 million in 2023, with 780 jobs lost.
Currently, the Social Security benefit is adjusted each year by the amount of increase in the cost of living for an urban resident as calculated by the federal government. This is known as the Consumer Price Index (CPI). The chained CPI would be a different measure of calculating inflation, and would result in a smaller increase in the annual raise for Social Security beneficiaries.
The result, according to the Congressional Budget Office, would be a reduction of 0.25 percent annually. If the inflation rate is calculated at 2 percent per year, then that is the amount of annual increase. Under the chained-CPI approach, the increase would be 1.75 percent per year.
One example of the chained CPI’s impact on older beneficiaries was calculated earlier this year by the National Women’s Law Center. Someone now collecting $17,000 a year in Social Security benefits would face a reduction of $1,384 in benefits at age 90, compared with what she would receive under the current CPI formula.
These may seem like small numbers, but the result becomes significant over time because each year’s reduced adjustment means a lower base upon which the next benefit increase is calculated.
The chained CPI had been discussed widely earlier in the year as a possible concession by the Obama Administration to reach a broad budget deal with Republicans in Congress. The President included it in his budget proposal, to take effect in 2015. Congress never adopted his budget, and talk of the chained CPI died down.
But the idea is emerging again, creating great agitation among liberal Democrats and advocates for elders, such as AARP, the influential lobby with 40 million members ages 50 and older.
On Monday, Oct. 7, AARP sent a letter to Congress, calling for an increase in the federal debt ceiling, but warning the legislators to avoid any tinkering with Social Security or Medicare.
In the letter, Nancy LeaMond, AARP executive vice president, state and national group, stated: “While we know older Americans are deeply concerned about the nation’s fiscal health, we also know that they want to make sure the promises made to them regarding Medicare and Social Security are honored and the safety net of Medicaid is protected.
“Our members are worried that the benefits they have earned may be cut as part of a deal to reduce the deficit, fund government operations, or increase the debt ceiling, and they are increasingly worried that if there is no agreement very soon, they may not receive their Social Security checks and may lose access to their health care,” she said.
AARP’s position, according to LeaMond, is that “it is critical that the United States does not default on its debt and that we protect the Social Security and Medicare benefits of current retirees.”
The AARP letter was the latest in a strong volley of opposition to any cuts in Social Security or Medicare.
On Oct. 3, members of the House Progressive Caucus and several dozen other opponents of the chained CPI formed a “human chain,” holding hands in front of the Capitol to demonstrate their opposition.
At the Campaign for America’s Future, a liberal advocacy and political organizing group, blogger Dave Johnson wrote a piece called “If Dems Give In, Social Security and Medicare Will Be Future Hostages.”
What makes them fearful is that President Obama’s budget this year called for adopting the chained CPI in 2015. But the budget was never acted upon by either house of Congress.
Congressional Republicans offering a budget deal to the President could argue that the chained CPI is his own favored idea, and thus should be included in a grand compromise to avert a default. The President is now taking the position that he wants a clean bill—an increase in the debt ceiling without concessions.
But no one can predict what will happen when the behind-the-scenes bargaining intensifies as the days dwindle down to the Oct. 17 deadline when the government will run out of money to pay its bills.
Robert Rosenblatt is a contributing writer for NextAvenue.org. A frequent contributor to Aging Today, he is a Senior Fellow at the National Academy of Social Insurance, in Washington, D.C.