The Social Security proposal you need to know about


By Bruce Kennedy Dec 20, 2012 9:21AM

Image: Social Security cards on clothes line -- Mike Kemp/Tetra images/Getty ImagesIt sounds about as exciting as skim milk, but the phrase "chained CPI" could play a role in fiscal cliff negotiations -- and it could impact your Social Security payments.

Republicans are reportedly suggesting a shift to chained CPI as one way of dealing with the deficit, and President Obama appears open to the move. That could impact the way Social Security benefits are calculated in the future.

To understand chained CPI, it's important to get a refresher on the standard CPI, or the Consumer Price Index. This index tracks price changes of goods and services in some 200 categories. The Bureau of Labor Statistics defines the index as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."


The government uses the CPI as one basis for adjusting dollar values on Social Security payments. During times of inflation, for example, the index rises and Social Security payments get cost-of-living adjustments, or COLAs.


"Chained CPI" doesn't just look at the prices of goods and services. It goes deeper into consumer choices and relative price changes. For an example, says the BLS, consider differences in the costs of pork and beef.

If the price of pork goes up while the price of beef doesn't, shoppers might shift away from pork to beef, the Bureau notes. Chained CPI accounts for this type of consumer substitution, while the standard CPI does not.

And here's the important part: In this example, chained CPI would rise, but not by as much as the standard CPI. In fact, the Congressional Budget Office says the chained CPI has grown at a slower rate than the traditional CPI, by an average of 0.3 percentage points annually over the past 10 years.


So what does that mean to you, the taxpaying consumer? Switching to a chained CPI will reduce spending on Social Security and federal pensions while increasing revenue for the government. The differences between the CPI and chained CPI may seem small, but they can add up. As the Columbia Journalism Review points out, the chained CPI "cuts spending and raises revenue, the twin strategies for reducing the federal deficit."


There are estimates the chained CPI could bring in hundreds of billions of dollars in savings for the government while generating billions more in revenue.  The unanswered question, though, is at what cost.


In a recent letter to Congress, the National Committee to Preserve Social Security and Medicare urged lawmakers to oppose any deficit reductions plans that would involve the chained CPI.


"This cut would reduce projected benefits for the oldest and most vulnerable Americans who would be least able to afford it," says the letter, which also notes that Social Security Administration officials estimate the chained CPI would bring about a 0.3 percentage drop compared to current cost-of-living adjustments.


"This reduced COLA would result in a decrease of about $130 per year (0.9%) in Social Security benefits for a typical 65 year old," The letter continues. "By the time that senior reaches age 95, the annual benefit cut will be almost $1,400, a 9.2% reduction from currently scheduled benefits. Remarkably, this is a benefit reduction that slightly exceeds the one month’s benefit for the average retiree."


The Christian Science Monitor says supporters of the chained CPI believe it’s a better way to measure inflation and reduce the deficit -- especially as a growing number of Baby Boomers retire and go on Social Security. 


But there's also a middle ground in the debate, according to the Monitor: those who argue that the change "should be cushioned by supplementing benefits for older retirees."

More from Money Now

Dec 20, 2012 10:35AM
Any deficit reduction deal should include a reduction in the pay and benefits of Congress and the President.
Until then, they are just taking from the people and giving to themselves.
Dec 20, 2012 10:53AM
avatar will not see any member of congress. no matter what they might claim, cut their own pay or insurance in any way. Congress always leaves itself exempt from anything they pass.  And let us not forget that all of members of congress are millionaires to one degree or the other...they will never do anything that effects themselves or their friends..who are also millionaires.
Dec 20, 2012 11:08AM
It seems that congress doesn't have a problem in complaining about a 1.7% increase in social security benefits while increasing the mandatory medical care premiums by 5% or more (yes, medicare is mandatory even though I had better insurance before I turned 65).  Their logic is the same premise as was the cause for the French Revolution.  We can spend more if we let the people have less.  Let's see congress apply the same logic to their salaries that they impose on the US taxpayers.
Dec 20, 2012 11:44AM
We could save a whole lot more by decreasing the size of government and decreasing Congressional pay and benefits and Presicential pay and benefits.
Dec 20, 2012 11:49AM
Do not reduce Social Security benefits!  This is all some folks have.  The Government needs to find cuts in other areas than Social Security.  Stop the other stupid worthless spending programs they have been involved in for years, but leave Social Security alone.  The budget can be balanced.  We as Americans have been balancing our own budgets for many years now.  Why can't you Federal Government?  Stop giving yourselves raises every year.  American workers sure don't get raises every year.  I went 3 long years without an increase in my last job.  How many in Congress have ever done that?  NONE!
Dec 20, 2012 11:39AM

So, if I understand this correctly.  If a pound of beef is $7 and a pound of pork is $4 and a pound of chicken is $1.50 and a person who is on social security is already on a chicken budget (most likely) if the pound of chicken goes up to $1.75 but the beef stays at $7 then the person would get a smaller or no increase because they would switch to beef?  Our governments logic at work. Idiots.

Lets not increase taxes on our millionaires when we can squeeze a couple of dollars out of our retirees.

Dec 20, 2012 11:56AM
The fat is not in the social 'benefits'.  Those entitlements were paid for.  The fat is in the spending on military and foreign aid.  Let's just stop sending billions to people who hate us.  If we can't get their respect by example we DAMN sure won't get it by buying them.  Name one facet of life where money buys respect.  We'll help them if WE control the cash flow.  All we've done is fatten corrupt regimes.
Dec 20, 2012 11:49AM
Before we go gouging the seniors in this country, lets look at Defense, for instance; why do we still have bases in Germany, Italy, England, etc. then foreign aid, why send millions to countries that spend it on new weapons to supress their oen population.  there are many places to reduce spending and increase revenues before you hit our own retirees.
Dec 20, 2012 11:58AM

Why do they go after the people that paid into these things.  I put into Social Security for 50 years, now I am a target.  Why not tax welfare?  When I was in the Army I had to pay income taxes.  So why do the welfare people keep getting a free ride.  The average package costs us about $65,000 a year.  I don't make that much, even when I was working, and I had to pay all sorts of taxes.

Dec 20, 2012 11:39AM
Another way to screw the seniors. This is by design another way for any cost of living adjustments, that are at present a joke, to fall even further behind the loss in purchase power of benefits. More seniors eating cat food and crackers because tuna and bread prices increased!
Dec 20, 2012 11:20AM

Raise the taxation cap on the income level for SS to $250K to improve its solvency for years. SS is now a-ok solvent for the next twenty years. Again, per the revered Republican Ronald Reagan, SS does not relate to the deficit and should not be a consideration regarding deficit spending as it is funded directly by the taxpayers! Google It!


All we hear about is how the average life expectancy has gone up and so SS should be adjusted accordingly. Well factor in how much average wage has gone up since the pre-1990 setting of the taxation limit and adjust upward accordingly FIRST!

Dec 20, 2012 12:02PM
What in the name of anything sensible has Social Security got to do with the budget?  I'm not saying S.S. doesn't need occasional adjustments but it has its own tax base separate from federal budget constraints or concerns.  Republicans of the political sphere,  Keep your greedy, grasping, destructive, dirty hands off.  You can't make Social Security  something it is not by calling it an "entitlement'' as though it were a defense contract with General Dynamics.  If you seriously want to do something about balancing the budget, cut the stupid side of so-called defense spending, lay off the mercenaries and then put your hands in your own millionaire/billionaire, banking and corporate pockets and pay the needed taxes and keep your hands out of MY pocket.  
Dec 20, 2012 11:08AM

So if the price of housing rises and people choose to live in tents, there is no change in the chained CPI?


Dec 20, 2012 11:46AM
another consideration is the means how CPI is determined.  The govt. doesn't include food and energy as they are too volatile, yet these items are very inflationary over time.  Another item is weighing medical costs as only 6% of the "basket" when it is over 18% of the GNP.  Consider utilities.  Look at your current expenses and compare them to just 10 years ago.  I sure that there has been minimal increases (ha ha).  Maybe electronics prices decrease but these are purchased irregularly while the above items are used on regular basis.  Inflation is occurring but being ignored by the govt. to promote their programs. 
Dec 20, 2012 11:44AM
as long as the politicos get the same raises and deductions as the people. (what is good for the goose is good for the gander.)
Dec 20, 2012 11:51AM
Why not start in the midterm elections in 2014, not to let the sitting people be unable to campaign for votes but run on their records and in 2016 do the same thing.( Put out a report card on the sitting officials) I'm sure that there would be a complete change in government attitudes. Let the new candidate campaign as usual, Not only would this save millions of dollars, but would make the government very transparent as to what they have done. ( Cut the election process down to 90 days).

Also make any laws passed in the last 12 years be retroactive on enforcing all elected officials be bound to live under the laws they passed, if you go back 12 years this should take the politics out of the equations. This would include cost of living increases, elimination of retirement benefits, medical care, and all would draw social security in lieu of the standing benefit programs in place.

I think this would eliminate only those who can outspend the next man.

Just a thought
Dec 20, 2012 12:02PM
bush 2 started this miss congress wants to finish off the low income & working class.if you want to fix social security do not give it to anyone who has never paid into it. 
Dec 20, 2012 11:54AM
The regular CPI doesn't track the real increase in the cost of living, as it is. Manufacturers have been down-sizing packaging on a steady basis for years to screw the consumers, and many of the unemployed and elderly have been using the lowest priced items just to survive. Now, the Republicans have come up with this "Chained CPI" that they can use to foist more expenses upon those who can least afford it, while protecting their patrons who have enough resources for ten lifetimes. It's bad enough that I think that the Democrats are conspiring to raise prices on everything that we buy to survive by making fuel more expensive with their constant proliferation of new regulations, Now, the Republications are proposing new ways to squeeze us from the other end of the spectrum. Politicians cannot be trusted to do anything other than to benefit themselves and their close friends.
Dec 20, 2012 12:05PM
The GOP had no problem spending $2 trillion on wars, $2 trillion on millionaire tax cuts, $773 billion on the failed 2008 stimulus bill. More than enough to keep Social Security solvent for the next 100 years, now their blaming those who paid their taxes and bills for fifty years, for their incompetent spending spree. Time for the spend, borrow and debase GOP to step down.
Dec 20, 2012 11:44AM
who really gives a crap nobody as a basic american we have diddlie to do with any of it were screwed
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