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Social Security and the Fiscal Cliff

Tuesday, December 18th, 2012

The buzz coming out of Washington today is about “chained CPI” and Social Security as part of the “fiscal cliff” deal. And some Washington watchers are saying that “chained CPI” means “reducing Social Security benefits.” What’s going on?

As you probably know by now,  the fiscal cliff is a collection of tax increases and budget cuts that will go into effect at the end of the year if Congress does not pass a law to stop them. President Obama has been meeting with Speaker of the House John Boehner to negotiate a bill that might get enough votes from both parties to pass.

There are several items under negotiation, but most of the disagreements boil down to budget cuts versus tax rate increases. Very generally — Republicans want to keep tax rates as they are, but they want big cuts in “entitlement” programs such as Medicare and Social Security. Democrats want to keep entitlement programs as they are, but they want to raise marginal tax rates on people making more than $250,000.

According to several news sources, the compromise that is emerging will include an increase in tax rates on incomes over $400,000 instead of $250,000, and federal spending will be cut by $1.22 trillion over 10 years. Many of these cuts would come about because of “chained CPI.”

For Social Security, what this means is that the annual cost of living adjustment for benefits would be calculated in a different way, and that different way would almost certainly mean that benefit adjustments would go up more slowly than they have been.

CPI stands for Consumer Price Index. It is a measure of changes in the price of goods and services that is maintained by the U.S. Bureau of Labor Statistics. The government makes many uses of this data. Cost-of-living increases in Social Security are determined by the CPI, meaning that benefits go up as the price of goods and services go up.

However, there are several different ways to determine the CPI. Social Security has been going by CPI-W, which is a measure of prices paid by urban wage-earners. But a lot of Washington “budget hawks” have been pushing to tie Social Security increases to C-CPI-U, or chained CPI. This measure assumes that as the price of a things or services go up, people change their buying habits and substitute something cheaper.

For example, if the price of steaks goes up, people stop buying steaks and eat more chicken. By this measure, the cost of living goes up more slowly than it does according to CPI-W. It is estimated that over three years an average beneficiary would receive $285 less with “chained CPI” than with the way benefits are determined now.

Understandably, many are opposed to changing Social Security at all. Seniors face enough challenges, from loss of income to health issues such as mesothelioma, which is most often diagnosed in older people. Social Security is not part of the general federal budget and is not a cause of the budget deficit.

But Republicans are keen to cut Social Security and other benefit programs. Switching Social Security to chained CPI is seen as one of the least bad concessions the White House can make in order to get Republican votes for a fiscal cliff deal.