FAQ: How Would Switching To the “Chained” CPI Affect Social Security Benefits?

FAQ: How Would Switching To the “Chained” CPI Affect Social Security Benefits?

Pending budget decisions over dwindling government funds will likely once again trigger a high-stakes battle over how to reduce the nation’s debt. A proposal that would reduce the rate of growth in annual Social Security cost-of-living adjustments (COLAs), as well as COLAs paid in other federal benefit programs, including those of military retirees, remains on the table. Here are a few answers to some of your frequently asked questions:

Q: I’ve been following the debate on the need for Social Security changes. How would switching to a more slowly growing CPI like the “chained” CPI affect my Social Security benefits?

A: The proposal to use the “chained” consumer price index (CPI), to determine the annual COLA would cut the amount of benefits you receive. The chained CPI measures inflation very differently than the workers CPI and the measured rate of inflation would grow more slowly using it. Social Security’s Chief Actuary estimates that this change would reduce benefits by an average of 0.3 tenths of a percentage point annually.

Q: Three tenths of a percentage point wouldn’t amount to a hill of beans! What’s the big deal?

A: The change is deceptive because it looks so tiny, but there are reasons to be wary. The chained CPI is relatively new and there are only 10 years of final data. That’s not much to give a clear picture of what to expect and how this index will perform under various economic conditions. The final numbers are only available after a two-year lag time and would require a much more complex COLA calculation. In tracking the chained CPI, we have noted that in the years in which inflation has jumped, when seniors need their COLA the most, the difference between the CPI currently used to calculate the COLAs, and the chained CPI has been the greatest.

In 2005 and 2008 when there were big spikes in petroleum costs, the difference has been about 0.6 — 0.7 tenths of a percentage point, more than double the average. That would mean a substantial erosion in the buying power of benefits during those periods that would not be recovered later. Third, COLAs are like interest. The loss of even a few tenths of a percentage point compounds over time, growing deeper every year. Over a retirement period the oldest beneficiaries who have been affected the longest, are hit the hardest.

Q: Do you have any estimates of the long-term financial impact on my benefits over a retirement period?

A: According to studies performed for TSCL, after 25 years Social Security benefits would be 7 percent lower than they would have been under the current CPI. For example, if you retire with average benefits of $1,125 per month in 2012, that’s projected to grow to $2,149.40 by 2037 under current law. If the government were to switch to the “chained” CPI starting in December 2012, the average benefit would be about $151.70 per month lower — $1,997.74 after 25 years. Altogether you would lose an estimated $19,455 in benefits over the period. And speaking of a hill of beans, that much money would buy you at least 12,970 pounds of beans — six tons and enough for 129,700 meals. That’s some hill of beans!