How Chained CPI Could Affect Social Security

As part of negotiations aimed at reducing the deficit, Congress and the President have considered changes to the way the Consumer Price Index (CPI) is calculated. “Chained CPI,” as the proposed method of calculation is known, could have adverse affects on Social Security benefits, as cost of living adjustments are based on CPI.

Proponents of chained CPI say that the current method of calculating CPI overestimates the real effect of inflation. When prices go up on some items, consumers may choose to purchase something else instead, thus mitigating the effects of inflation. This “substitution bias” is addressed by chained CPI. This technical change would result in lower payments for Social Security beneficiaries.

The proposed change is popular among politicians seeking to reduce the deficit, as it is estimated that there could be a reduction of about $390 billion from the deficit over the first decade, with about one third of the savings resulting from lower Social Security benefits payments.

Of course, Social Security beneficiaries do not want lower payments, and advocates for seniors have pointed out that chained CPI is not appropriate for estimating the cost of living for older people, as many of their expenses, such as medication and health care, are fixed, and therefore not prone to substitution bias. Further, Social Security is financed separately from the rest of the budget, and does not contribute to deficits in other parts of the budget. The bottom line is that seniors who depend on a fixed income are least able to afford cutbacks.

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