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Social Security: Lower COLAs on the Table

New inflation measure could shrink checks

White House officials and congressional leaders immersed in deficit reduction talks are urging changes to the way Social Security cost-of-living adjustments are calculated. But the changes would likely result in smaller payments for millions of beneficiaries.

See also: Debt ceiling debate: More questions than answers. 

The consumer price index for urban wage earners and clerical workers (CPI-W), which currently determines Social Security COLAs, measures the change in price of a basket of goods and services from one year to the next. Economists use the numbers to get an idea of how inflation has affected consumers' purchasing power.

However, some critics argue that the CPI-W does not accurately measure inflation because people typically respond to rising prices by substituting less expensive items.

For example, if the price of apples increases, consumers would instead purchase bananas, which are less expensive. So their buying power wouldn't be as affected by price hikes as previously thought. As a result, those critics argue, the COLA should actually be lower.

Why a chained CPI?

In response, the "Gang of Six" senators who are working on a deficit reduction package this week proposed switching to a measure known as the chained CPI. By accounting for the substitution factor, it would adjust future COLAs downward — according to the Congressional Budget Office, benefits paid out by Social Security would fall by $108 billion over 10 years.

The Strengthen Social Security Campaign, a coalition of national and state organizations working to prevent Social Security cuts, calculated how that would affect individual recipients.

According to the campaign, workers with average annual earnings of approximately $43,084 who retired at age 65 would get $256 less in annual Social Security benefits at age 70 under the chained CPI formula. At that age, the total amount of benefits collected would be $768 less. By the time the workers reached 85, they'd be getting $1,000 less in annual Social Security benefits and $10,592 less in accumulated benefits.

The chained CPI "breaks a promise made by many politicians to not cut the benefits of anyone over age 55," Nancy Altman, co-chair of the Strengthen Social Security Campaign, said in a statement Wednesday.

Switching to this measure would take money "directly out of the pockets of beneficiaries, with cuts growing larger each year and pushing many of the oldest old, primarily women, into poverty," she said.

AARP also opposes this step. "The chained CPI should not be considered as part of the debt ceiling or deficit reduction negotiations," said AARP Executive Vice President Nancy LeaMond. "Reducing the COLA even by a small amount is a harmful cut for many retirees. Any discussion of proposals that would affect Social Security should occur only in a separate debate on strengthening Social Security and improving retirement security, not on balancing the budget."

Next: What's the effect on long-term funding? >>

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