Changes to the Consumer Price Index (CPI) could play a crucial role in Social Security reform because the CPI directly affects Social Security through the automatic cost-of-living adjustments. This AARP Public Policy Institute Issue Brief provides an overview of the current CPI, discusses past CPI revisions, explains the differences between a CPI and a cost-of-living index (COLI), gives the reasoning behind some recent changes in the calculation, and describes a new measure called the “chained” or “superlative” index.
The chained index takes better account of changes in consumer expenditures in every period, making it a more accurate cost-of-living measure. If the superlative index is used in place of CPI-W, or in other words, if the CPI were to grow one-half a percentage point less, the federal budget deficit is likely to fall by $174 billion cumulatively over 10 years (2005-2014), and by $3.1 trillion cumulatively over 2005-2028.
The paper speculates on the impact of potential changes in the CPI on Social Security benefits, the Social Security trust funds, and Social Security benefits as a share of the gross domestic product (GDP). (13 pages)