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Monday, July 11, 2011

How Would Shifting to a Chained CPI Affect Elderly and Disabled Americans and the Federal Budget?

Virginia P. Reno, National Academy of Social Insurance

Shifting to a new CPI to lower future Social Security benefits is part of current debt ceiling negotiations. Some call for using the new consumer price index to make cost-of-living adjustments (COLAs) in Social Security and other federal benefits and to adjust brackets in the federal income tax code. Proponents of the new index – the chained CPI-U – describe it as a technical correction that would make the benefit adjustments more accurately reflect the cost of living experienced by average consumers. In fact, the chained CPI-U falls short of reflecting the living costs of the elderly and disabled because it does not take account of their higher out-of-pocket spending for health care. NASI has two fact sheets on this topic.

Should Social Security’s Cost-of-Living Adjustment Be Changed? Shifting to a special price index for the elderly would increase the COLA for elderly and disabled Americans, while shifting to a chained CPI-U would lower benefits for current and future recipients. The largest impacts would fall on the oldest Americans. Because Social Security provides an ever-greater share of elders’ incomes as they grow older – as pensions are eroded by inflation, employment options end, and savings are depleted – even a minor erosion of the real value of benefits is a public policy concern.

How Would Shifting to a Chained CPI Affect the Federal Budget? Because the chained CPI-U grows more slowly than indexes now used, it would reduce benefit outlays and increase revenues. Over the next decade (2012-2021), nearly two thirds of the impact would come from benefit reductions in programs such as Social Security, federal pensions, veterans’ pensions and compensation, and Supplemental Security Income, while one third would come from increased revenues and decreased EITC payments. Beyond the first ten years, revenue gains are likely to shrink, while benefit cuts borne by elderly and disabled Americans are likely to remain indefinitely.

Download the fact sheets to read more:

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