What is Chained CPI and How Does It Affect Seniors?
What is CPI?
The U.S. Bureau of Labor defines Consumer Price Index, or CPI, as a measure of the average change over time in the prices paid by consumers for certain categories of goods and services. The Bureau of Labor Statistics uses very detailed surveys of what households are actually buying to measure the CPI. CPI is a common measure of inflation. The government often relies on CPI trends to form economic policies.
CPI reflects spending patterns for most of the population, specifically urban consumers and wager earners, which include professionals, self-employed, poor, unemployed, and retired persons. The spending patterns of people living in rural areas, farm families, people in Armed forces, and people in prisons and mental hospitals are not included.
The major categories of goods and services taken into account include day-to-day consumption expenses of food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and related taxes, etc.
What is chained CPI?
Chained CPI calculates a new index by factoring in the concept of substitution, which means how people shift away from a good when the price of that good rises. For instance, if coffee prices rise, people may choose to drink other caffeine substitutes, such as soda or tea. If gasoline prices increase, more people may choose to take the bus or subway rather than drive their cars.
According to the Congressional Budget Office, chained CPI produces lower estimates of inflation than CPI, rising at approximately 0.25% less each year. Numerous seniors and labor organizations criticize the current index for failing to take into account that seniors spend a higher percentage of their incomes on medical and other health care costs which have no cheaper substitutes.
What is the impact of using chained CPI?
Currently, the government uses CPI to determine increases in tax brackets, cost-of-living adjustments for retirees receiving Social Security benefits, funding for programs, and eligibility for government assistance, and pension payments for federal and military retirees. Calculations based on chained CPI instead of CPI would affect these taxes, programs, and benefit amounts.
How does chained CPI affect Social Security?
The “cost of living adjustment,” or COLA, adjusts Social Security benefits to take into account the rising cost of goods and living expenses. Currently, CPI is used annually to adjust benefits paid to Social Security beneficiaries. In 2012, the COLA was 3.6%; in 2013, the COLA will be 1.7%. Without the adjustment, Social Security benefits would remain the same even while the cost of living increases.
Approximately 56 million people receive Social Security benefits. For many families and individuals, Social Security benefits are the main and/or only source of income. Currently, Social Security beneficiaries consist of the following:
- 70% are retired workers or their spouse and children;
- 11% are survivors of deceased workers; and
- 19% are disabled workers or their spouse and children.
In March 2011, the Congressional Budget Office estimated a chained CPI calculation would result in $112 billion reduction in Social Security benefits from 2012 through 2021.
According to the Social Security Administration, a person born in 1935 who retired at age 65 in 2000 earned an average initial monthly benefit of $1,435, or $17,220 a year. Under the COLA formula and 2012 inflation, the benefit would rise to $1,986 a month in 2013, or $23,832 a year.
However, under chained CPI, the retiree would receive $1,880 a month, or $22,560 a year. For seniors on a fixed income, this reduced benefit has the short-term effect of forcing individuals and families to cut their already-tight monthly budgets. Seniors and their families must decide how they can make do with less. For an already-vulnerable population, this translates into less money for groceries, medications, and doctor visits.
Furthermore, this benefit cut would compound over time. After ten years of reduced cost-of-living increase, a senior would receive about 3% less per month than under the current index. By age 95, a senior retiring today would receive approximately 8% less. Clearly, under chained CPI, benefits would erode over time.
Which programs, besides Social Security, are also affected?
The switch from CPI to chained CPI would harm not only retirees but people with disabilities, children, and low-income working-age adults by changing eligibility standards and benefit amounts. According to the Congressional Research Services, other major federal benefits programs affected by chained CPI calculations include but are not limited to the following:
- Some Medicare benefits, such as initial and catastrophic coverage amounts under the standard outpatient prescription drug benefit (Part D);
- Supplemental Security Income;
- Civil Service Retirement System;
- Federal Employees Retirement System;
- Military Retirement;
- Veterans Disability Compensation;
- Railroad Retirement Board;
- Earned Income Tax Credit;
- Child Tax Credit;
- Unemployment Compensation;
- Supplemental Nutritional Assistance Program; and
- Child Nutrition Programs.
Post by Attorney Sharon Lee