Chained CPI

Social Security benefits contain a modest, automatic cost of living adjustment (COLA) linked to the consumer price index (CPI). A "chained" CPI changes the way the Bureau of Labor Statistics measures the cost of living in a manner that would reduce the expected benefit increase each year, and those reductions would grow larger over time.

In April of 2013, the Wall Street Journal reported that President Barack Obama was planning to propose a chained CPI in a White House budget bill as a way to convince Republicans to raise taxes in a "Grand Bargain" on a deficit reduction package. The proposal was immediately rejected by the Republican Speaker of the House John Boehner and generated heated backlash from the Democratic base, which polls show overwhelmingly support strengthening Social Security. Fix the Debt, Wall Street billionaire Pete Peterson's austerity group, promptly applauded Obama's move in an email to supporters: "Reports suggest the President’s proposals could help point the way toward productive bipartisan compromise to help Fix the Debt."

When speaking to the AARP on September 6, 2008, then-Senator Obama told them Republican presidential candidate John McCain was “suggesting that the best answer to the growing pressures on Social Security might be to cut cost-of-living adjustments or raise the retirement age. I will not do either.” Obama also pledged in the 2011 State of the Union to strengthen Social Security, not to cut it.

Learn more about Social Security on Sourcewatch's main page on Social Security here.

President Obama Introduces Budget with Social Security & Medicare Cuts

On April 10, 2013 President Obama introduced a new federal budget proposal that would implement Social Security and Medicare cuts in order to pay down the nation's debt. The cuts were made in a unilateral attempt as an enticement to get Republicans to agree to a "Grand Bargain" on deficit reduction that would also include tax increases.

The National Committee to Protect Social Security and Medicare issued the following statement:

“Federal budgets are far more than just numbers on a page. They represent national priorities for our fiscal future. That’s why so many middle-class Americans are stunned to see President Obama’s budget priorities include cutting benefits to millions of seniors, retired veterans and people with disabilities. This budget also includes more means testing for seniors in Medicare and less than half the new revenue requested in earlier budget negotiations. The President’s budget is not the balanced plan promised to Americans before November’s election.

Changing the current cost of living allowance formula to a stingier and less accurate Chained CPI is an immediate benefit cut for millions living on already modest incomes. The White House knows this formula is not more accurate for seniors, which is why it’s promised exemptions and bumps to try and soften the blow for some. But it still leaves millions of seniors facing benefit cuts, breaking the promise President Obama made to protect America’s middle class families."

U.S. Senator Bernie Sanders told the Huffington Post that not even House Budget Committee Chairman Paul Ryan (R-Wis.) touched Social Security in his austere budget outline last year, meaning Obama essentially owns the proposal.

"Paul Ryan, in the worst budget ever presented in the history of the United States, did not mention Social Security, so of course [Obama] owns it," Sanders said as he left a rally outside the White House, where he and a handful of congressional Democrats, Social Security advocates, and labor leaders denounced Social Security cuts on Tuesday.

"And I suspect that our Republican friends will make sure the American people understand that he owns it, and make sure the American people understand that any Democrat who supports cuts in Social Security and benefits for disabled vets will also be forced to own that," Sanders said. "From a political point of view it is to my mind just a really dumb tactic. I don't understand it."

Impact of Changes to Chained CPI

Richard Nixon implemented automatic Social Security cost of living increases in the 1970s. According to Social Security Works, chained CPI would change the formula for those cost of living increases in a manner that cuts the annual benefit of the average earner (someone making $43,518) by $658 at age 75, $1,147 at age 85, and $1,622 at age 95. The cumulative cut for that individual would be $4,631 – more than three months of benefits – by age 75; $13,910 – nearly a year of benefits – by age 85; and $28,004 – more than a year and a half of benefits – by age 95.

"Chained CPI (the proposal to cut Social Security benefits)," by Robert Reich

Former Secretary of Labor Robert Reich weighs in on chained CPI:

Even Social Security's current inflation adjustment understates the true impact of inflation on the elderly. That's because they spend 20 to 40 percent of their incomes on health care, and health-care costs have been rising faster than inflation. So why adopt a new inflation

adjustment that's even stingier than the current one?

Social Security benefits are already meager for most recipients. The median income of Americans over 65 is less than $20,000 a year. Nearly 70 percent of them depend on Social Security for more than half of this. The average Social Security benefit is less than $15,000 a year.

Besides, Social Security isn't in serious trouble. The Social Security trust fund is flush for at least two decades. If we want to ensure it's there beyond that, there's an easy fix -- just lift the ceiling on income subject to Social Security taxes, which is now $113,700.

Why are Democrats even suggesting the inflation adjustment be reduced? Republicans aren't asking for it. Not even Paul Ryan's draconian budget includes it.

Democrats invented Social Security and have been protecting it for almost 80 years. They shouldn't be leading the charge against it.

Proposed Exemptions

The "chained CPI" changes would negatively impact millions of seniors and veterans. U.S. Bernie Sanders has vowed to “do everything in my power to block President Obama’s proposal to cut benefits for Social Security recipients through a chained consumer price index.”

The proposal from the Obama Administration includes exempting Supplemental Security Income (SSI) benefits for people with disabilities and seniors in the lowest income bracket. There are 2.8 million people who qualify for both. Also proposed are exemptions for veterans or recipients who are already older than 84 years old.

Approximately one out of five Social Security beneficiaries is poor or near-poor. At least 9.4 million receive Social Security, but not SSI. The Disability Insurance component of Social Security is a lifeline to 8.6 million Americans with disabilities and their 2 million dependents. Those who are disabled at a young age could be subject to the chained CPI cut for 30, 40 years or more.

Military and veterans' benefits that are indexed in the same manner as Social Security include Military Retirement pensions, for which many veterans are eligible; Veterans Pension benefits; Veterans Disability Compensation; and Dependency and Indemnity Compensation. This means they could get hit with triple cuts or even more. About 9.3 million veterans received Social Security benefits in 2009 – just over one in five Social Security beneficiaries.

The Administration has also floated shielding the oldest Social Security beneficiaries, people who are at least 85 years old. There were 5.8 million such recipients in 2010, and there is a projected 19 million in 2050.

A group not yet considered for exemption are people with long-term disabilities: 8.6 million adults and their 2 million dependents. Those who are disabled at a young age could be subject to the chained CPI cut for 30, 40 years or more. The effect of the COLA cut compounds over time, so people with disabilities would see a much larger benefit cut from the change in the COLA than any other group of beneficiaries.

Cost of Exemptions

Social Security Benefit Cuts from Chained CPI - Net of Benefit Enhancement for the Average Worker Retiring at Age 65

Social Security Works took proposed exemptions into consideration:

Savings Lost from Exempting These Groups
Most Americans who receive Social Security live on modest means. Half of elderly Americans live on less than $19,939/year and have Social Security benefits of less than $13,376/year. Of the $725 billion in total benefits paid in 2011,

Social Security paid:

• $58.3 billion to people who are poor or near-poor (excluding those aged 85 and older);
• $131 billion to those who are aged 85 or above (including veterans);
• $176.4 billion to veterans and their families (net of the above two groups)

Together, this amounts to $356.8 billion, or 50.5% of total benefits. If Congress truly wants to protect these groups, it would use the current Cost Of Living Analysis for half of Social Security’s beneficiaries and the chained CPI for the other – and the groups are not static. People’s overall income shifts from month to month; married couples who are different ages could have one partner subject to one COLA, the other subject to another.

Objections To Cuts

Many of President Obama's most reliable allies, particularly the AFL-CIO, have expressed outrage: "The "chained" CPI is based on a fraudulent premise - that the CPI is rising faster than the actual cost of living experienced by seniors, veterans and millions of other vulnerable citizens living on meager incomes. In fact, because seniors in particular have limited flexibility and spend a disproportionate share of their income on health care, they tend to experience more rapid inflation than the general population."

Economist Dean Baker notes, “Using the chained CPI to calculate benefits would have a much larger impact on the income of most retirees than President Obama’s tax increases last year did on the wealthy. For a couple earning $500,000 a year, their taxes went up by $2,300 a year. That is less than 0.5 percent of their pre-tax income and a 0.6 reduction of their after tax income. Since Social Security is about 70 percent of the income of the typical retiree, switching from the current index to the chained CPI would be a reduction in income of more than 2 percent, more three times that of the tax increase to the wealthy. It is worth noting that Social Security in law and in practice has been kept out of budget negotiations. This makes the proposal on the chained CPI all the more unfortunate. While there will eventually have to be an agreement to address the projected long-term shortfall in Social Security’s funding, President Obama is proposing to make a cut to benefits while getting zero in terms of increased revenue for the program. This is not the approach of someone who values the Social Security program."

Polling Shows Little Support for Social Security Cuts

The National Committee to Preserve Social Security & Medicare and Lake Research found in a November, 2012 poll:

• Voters strongly oppose cutting Social Security benefits with 71% opposed to means-testing and 67% opposed to raising the retirement age
• 64% strongly oppose cutting Medicare benefits for future retirees and 59% oppose cutting payments to Medicare providers want voters support two Social Security and Medicare reforms by overwhelming margins
• On Social Security, voters across party lines support lifting the cap on wages above the current level of $110,100. We know from focus groups that voters see this cap as an unfair loophole that they did not even know existed. Sixty-five (65) percent of voters favor gradually lifting this cap for both employees and employers, including 75 percent of Democrats, 63 percent of Independents, and 54 percent of Republicans.

This is echoed by an AARP poll from mid-March of 2013, where 70 percent said they oppose using a chained CPI for Social Security and 78 percent said they oppose using a chained CPI for veterans benefits.

Fewer Pensions: For much of the last generation, employer defined-benefit pensions guaranteed a stable source of elderly income. Workers, who often spent entire careers at the same firm, could rely on the employer defined-benefit pension. In 1980, about 40 percent of private-sector workers had a defined-benefit pension from their employer, including 84 percent for workers in large companies. Since the mid-1980s, however, defined-benefit pensions have steeply declined. Fewer than 15 percent of all private-sector workers, and 32 percent of those in large companies, have these pensions today – a 62 percent drop. What is left in the wake of vanishing defined-benefit pensions, costly and risky 401(k)s, and insufficient additional private savings? Social Security.

Much of the information above was contributed by Social Security Works, a 501(c)(3) advocacy group working to strengthen Social Security.