How would ‘Chained CPI’ affect your benefits?

 

A House Ways and Means subcommittee on Wednesday held a hearing to examine the impacts of using “Chained CPI” to slow the growth in entitlement spending and increase tax revenue.

Rep. Rick Nolan (D-Minn.) speaks to a group of protesters outside of the White House voicing frustration at the president's proposal to trim entitlement spending. (AP Photo/J. David Ake)
Rep. Rick Nolan (D-Minn.) speaks to a group of protesters outside of the White House voicing frustration at the president’s proposal to trim entitlement spending. (J. David Ake/AP)

President Obama has put Chained CPI on the table as part of his proposal to cut entitlements in exchange for higher taxes, but many Democrats think that deal gives away too much to Republicans.

All this probably leads our readers to wonder: What is Chained CPI, and how would it affect me?

Before we jump too far into the weeds on this, readers should know that the National Active and Retired Federal Employees Association published a calculator that estimates how chained CPI would affect individuals over time, based on the size of their annual benefit.

Now for the details.

Chained CPI is shorthand for the “Chained Consumer Price Index for All Urban Consumers.” It’s an inflation measure that essentially ties tax rates and entitlement spending to the rise in prices over time.

The government currently uses a different inflation measure to calculate Social Security benefits, applying the CPI-W, or “Consumer Price Index for Urban Wage Earners and Clerical Workers” to its formula.

Using Chained CPI instead of CPI-W would slow the rate of growth for entitlement benefits and cause people to enter higher tax brackets more quickly — because the income parameters for each bracket would rise more slowly.

Chained CPI would reduce entitlement benefits by about 0.3 percentage points per year. That’s a small amount, but it results in big savings for the government over time. On the other hand, the relatively minute cuts can build up for recipients.

Generally speaking, proponents say the newer inflation measure tracks inflation more accurately than the current CPI-W index, mainly because it accounts for changes in consumer behavior as prices rise. For instance, a person might switch to generic soda if the price of brand-name beverages increases more than they’re willing to bear.

Opponents contend that Chained CPI doesn’t give adequate weight to the steep and steady rise in healthcare costs, which affect seniors disproportionately.

In testimony for Wednesday’s hearing, Nancy J. Altman, who co-chairs the Strengthen Social Security Coalition, described the new inflation measure as “a benefit cut masquerading as a technical adjustment,” suggesting that lawmakers are downplaying its potential impacts.

President Obama’s 2014 budget proposes the use of Chained CPI as part of a deficit-reduction plan that includes entitlement cuts and higher taxes.

Entitlements — which include Medicare, Medicaid and Social Security — make up about 40 percent of federal spending, and the costs have increased exponentially over the years.

Reducing entitlement spending is a top priority for Republicans, who have largely embraced Obama’s offer to use Chained CPI. But many Democrats vehemently oppose any cuts in Social Security, which is one of the marquee achievements of President Franklin D. Roosevelt’s New Deal movement.

Federal-employee groups also oppose the new inflation measure. “A switch to the chained CPI is a reduction to the earned and promised retirement benefits of middle-class Americans,” said NARFE president Joseph A. Beaudoin. “Individuals who have worked their whole lives to earn their retirement benefits will receive less money in the future. That sounds like a real benefit cut to them, and it is.”

For more information on this topic, see previous Washington Post articles from WonkblogThe Fix, and The Fact Checker.

For more federal news, visit The Federal Eye, The Fed Page and Post Politics.

To connect with Josh Hicks, follow his Twitter feed, subscribe to his Facebook page or e-mail josh.hicks@washpost.com.

E-mail federalworker@washpost.com with news tips and other suggestions.

Josh Hicks covers the federal government and anchors the Federal Eye blog. He reported for newspapers in the Detroit and Seattle suburbs before joining the Post as a contributor to Glenn Kessler’s Fact Checker blog in 2011.
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