How Would Shifting to a Chained CPI Affect the Federal Budget?

Two recent deficit reduction commissions called for using a 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. Others maintain that the chained CPI-U falls short of reflecting the living costs experienced by the elderly and disabled because it does not take account of their higher out-ofpocket spending for health care. NASI’s Fact Sheet No. 2, Should Social Security’s Cost-of-Living Adjustment Be Changed?, explores how adequately the chained CPI-U would track living costs of Social Security beneficiaries compared to a special price index for the elderly. 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.

This fact sheet examines the impact of the chained CPI-U on the federal budget over the next decade (2012-2021), drawing on estimates by the Congressional Budget Office (CBO). Because the chained CPI-U grows more slowly than indexes now used, it would reduce benefit outlays and increase revenues. 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. Beyond the first ten years, revenue gains are likely to shrink, while benefit cuts borne by elderly and disabled recipients are likely to remain indefinitely. Read more.