COLA Lite? There’s a rumor that the supercommittee may push for the chained CPI

Rumor has it that the Joint Select Committee on Deficit Reduction, aka “supercommittee,” is considering a switch from the present Consumer Price Index (CPI) to a “chained CPI” to determine Social Security’s cost-of-living adjustment (COLA). While proponents describe the change as a “technical correction” (because the present CPI is believed to overstate the inflation experienced by average consumers), the chained CPI would understate the inflation experienced by older Americans, largely because of their relatively high out-of-pocket healthcare costs and their limited ability to make substitutions (such as fuel for food) when prices rise. Switching to a chained CPI would mean cutting Social Security benefits by gradually eroding their purchasing power – a cut that would compound over time, becoming more and more severe as beneficiaries grow older.

Two NASI fact sheets discuss the consequences.

• How Would Shifting to a Chained CPI Affect the Federal Budget?  Because the chained CPI grows more slowly than indexes now used, it would reduce benefit outlays and increase revenues in the federal budget overall. Over the next decade (2012-2021), nearly two thirds of the impact would come from cuts in Social Security, veterans benefits, federal pensions and Supplemental Security Income, while one third would come from increased general revenues. Beyond the first ten years, revenue gains are likely to shrink or disappear, while benefit cuts borne by elderly and disabled Americans are likely to remain. Read more.

• Should Social Security’s Cost-of-Living Adjustment Be Changed? The chained CPI would lower benefits for current and future beneficiaries. In contrast, adoption of a special price index for the elderly (CPI-E) would increase the COLA for elderly and disabled Americans to reflect the prices they actually experience.  The oldest Americans would experience the biggest changes, whether in seeing benefits cut by the chained CPI or increased by the CPI-E. Because Social Security becomes increasingly important at advanced ages (as pensions are eroded by inflation, jobs in retirement end, and savings are depleted), even minor erosion of the purchasing power of benefits is a public policy concern. Read more.