The ins and outs of ‘chained CPI’ explained

April 10, 2013

President Obama released his budget blueprint on Wednesday, a proposal that cuts more than $1 trillion in spending on government programs and adds nearly $800 billion in new taxes. With the release comes greater attention to a very technical term: "chained CPI."

No, it's not the name of a heavy metal band or a new workout routine. It's an important part of Obama's budget which has already been met by both praise and criticism. Want to know more? Below, we give you the details on what you need to know.

What is chained CPI?


Like balloons, chained CPI is all about inflation. (Nic Bothma/EPA)

Chained CPI is shorthand for "Chained Consumer Price Index for All Urban Consumers." In short, it's a way to index spending and taxes -- including Social Security benefits -- to the rate of inflation, or the rise in prices over time. But it's not the only way.

What's important in the context of the debate over Obama's budget is that chained CPI would mean Social Security benefits would increase at a slower rate than they do using the current index.

What difference does it make?

As our friends over at Wonkblog pointed out last year, Social Security benefits are currently calculated using CPI-W, or the Consumer Price Index for Urban Wage Earners and Clerical Workers. (Yes, that's a mouthful.) Over time, benefit levels tick up based on CPI-W, to keep up with the fact that a dollar twenty years ago is not worth what it is today.

Here's the bottom line: Using chained CPI instead of CPI-W means the rate at which those benefits tick up would be slower, because the former reflects substitutions consumers would make in response to rising prices of certain items.Therein lies the "chained" part of the name. The metric utilizes a basket of goods and services that are measured changes from month to month; much like a daisy chain. If the cost of a certain form of transportation goes up, for example, people might switch to another kind. This kind of "substitution" is part of what is factored into chained CPI.

Overall, the change would save the federal government about $130 billion over the next decade.

(The Bureau of Labor Statistics has a good FAQ here, if you're looking for even more detail about the different mechanisms for taking inflation into account.)

Who likes chained CPI?

Republicans do. Even as GOP leaders slammed Obama's budget as a whole Wednesday, they found room to offer some praise for his approach to entitlements, which includes Social Security.

"The President seems prepared to finally concede this time that at least something needs to be done to save entitlements from their inevitable slide toward bankruptcy," said Senate Minority Leader Mitch McConnell (R-Ky.). House Speaker John Boehner (R-Ohio) said Obama "does deserve some credit for some incremental entitlement reforms that he has outlined in his budget."

Who doesn't?

Many Democratic lawmakers and groups that represent seniors. The AARP opposes it. House Minority Whip Steny Hoyer (D-Md.) was less hostile, though he told Politico Tuesday that House Democrats are not ready to back the idea. In the end, Democrats might come around, but for now, it's most definitely not something they are embracing en masse.

So why did Obama put it in his budget?

Compromise and challenge. Obama is trying to show Republicans that he is serious about trying to strike a big deficit reduction deal -- serious enough to find some middle ground with them, even if it means enraging part of his base by embracing ideas like chained CPI.

But it's also an effort to challenge Republicans to embrace new tax revenue as part of the deal -- something they have been mostly unwilling to do since the tax increases they signed off on in the deal to avert the "fiscal cliff." “If you’re serious about deficit reduction, then there’s no excuse to keep these loopholes open,” Obama said.

If Obama doesn't get a deal, look for him to say that he tried, but Republicans failed to meet him in the middle. Of course, Republicans will say the same thing about Obama. The definition of "the middle" is something both sides aren't likely to come to terms over.

What's next?


(Charles Dharapak/AP)

Obama's budget is one of three proposals out there right now. Senate Democrats and House Republicans have forwarded plans of their own. It's pretty clear that, given divided government, none are going to pass without some compromise and adjusting.

Sean Sullivan has covered national politics for The Washington Post since 2012.
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