What's a chained CPI?
The chained CPI was proposed as a way to trim the budget deficit by changing the way federal benefits are adjusted for inflation. The formula operates on the principle of substitution. For instance, if beef prices rise much faster than chicken prices, and consumers buy less beef and more poultry or pork as a result, their total costs for the month rise less quickly.
Using the chained CPI, inflation wouldn't be considered to rise as much or as fast because of marketplace substitutions that consumers would presumably make. And that would amount to lower COLAs. But the index doesn't factor in the high out-of-pocket health care costs paid by older Americans.
Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, says the formula is flawed because there are few substitutions consumers can make when it comes to calculating health care costs.
"If the price of steak goes up, you can look at other foods to substitute to keep up with inflation," he says. "But what's the substitute for health care? You go to the doctor less often? You don't have the test to determine if that lump is cancer?"
AARP Executive Vice President Nancy LeaMond says the chained CPI formula would cut Social Security benefits by $112 billion over 10 years, adding that the older people get, the larger the cut.
"It would be hard to overstate the financial peace of mind Social Security provides" for recipients, she says. "It is the principal source of family income for nearly half of older Americans, who have incomes of roughly $20,000, and keeps nearly one-third of them out of poverty.
"Unfortunately, the increase announced today will not completely ease their burden," she says. "Medicare premiums are also expected to rise for many.
"And with the decline in housing values, deep losses to retirement and savings accounts, and skyrocketing health and prescription drug costs, millions of older Americans continue to struggle to make ends meet."
According to the Social Security Administration, one in two married couples and three in four single people rely on Social Security for at least half of their income.
The SSA also announced Wednesday that beginning next year, the earnings subject to the Social Security tax will increase to $110,100 from $106,800. Of the estimated 161 million workers who will pay Social Security taxes in 2012, about 10 million will pay higher taxes as a result of the earnings increase.
Also of interest: Latinos depend on Social Security. >>
Carole Fleck is a senior editor at the AARP Bulletin.