January 13, 2013
“Chained CPI” is the new magic phrase going around Washington these days. This is how the government can cut Social Security and pretend it is not really cutting Social Security.
If anyone has not yet heard the story, the plan is to change the indexation formula for the annual cost of living adjustment by using the chained CPI to measure inflation. It’s not worth going into the details (the people proposing it don’t care, why should you?), but the point is that the chained CPI would reduce the annual adjustment by 0.3 percentage points.
This may sound trivial but it adds up over time. After ten years a retiree’s benefits would be 3 percent lower, after twenty years 6 percent lower and someone surviving to collect benefits for thirty years would see a 9 percent cut. If we assume the average retiree collects benefits for 20 years, this amounts to a 3 percent cut in total benefits. If that sounds small, ask the “job creators” about the impact of a 3 percentage point increase in their tax rate.
Anyhow, a NYT editorial on the topic makes all the right points, including an obvious one, if the concern is making the indexation formula more accurate we can have the Bureau of Labor Statistics (BLS) construct a full cost of living index for the elderly. An experimental index that BLS already produces shows that the current cost of living adjustment is actually less than the rate of inflation seen by the elderly. There is a long way from this experimental index to a full elderly CPI, but given that we will index $10 trillion in Social Security benefits over the next decade, it might be worth going this route.
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