Chained CPI: Proposed New COLA Leaves Bad Taste

 One of the proposals floated for months in the fiscal bluff debate in Washington, D.C., is a change to the formula used to measure inflation for Social Security Cost-of-Living Adjustments (COLAs) called the “chained” CPI. Let’s be clear: This is a benefit cut. These COLAs make sure seniors’ income keeps pace with the rising costs of housing and food. The “chained” CPI would cut future Social Security benefits by as much as $2,432 for someone who is 17 years old today. Studies from the Center for Economic and Policy Research (CEPR) show that not only is the “chained” CPI a benefit cut, it eventually will lead to higher taxes for most working people.

For instance, CEPR estimated that the change to the “chained” CPI would lead to a cut in benefits of three percent after 10 years, six percent after 20 years and nine percent after 30 years. The cuts also would hit lower-income retirees harder, as they would lose larger proportions of their incomes than wealthy recipients. The change also would amount to a tax increase on working families:

The “chained” CPI would also effectively raise taxes on virtually all working people, especially middle- and lower-income families. By applying it to all government programs, including the annual adjustment in income tax brackets, the “chained” CPI would cause those thresholds to rise more slowly than they do now. That would lead to incomes jumping up to higher tax brackets faster, or in other words, income tax increases.

According to Congress’ Joint Committee on Taxation, if individual income taxes were indexed to the “chained” CPI starting in January 2013, by 2021, 69 percent of the gains in revenue would come from taxpayers with incomes below $100,000, while the wealthiest taxpayers barely would be affected.

The change wouldn’t hurt just the elderly, either. The shift to the “chained” CPI also would harm veterans, people with disabilities, low-income children and others whose safety net depends on CPI estimates to determine eligibility for various government programs.

Workers who receive Social Security benefits because they have a disability obviously have health care costs, said William Spriggs, chief economist at the AFL-CIO. Those health care costs have been rising faster than general inflation. So, when their benefits are adjusting now, they fall behind the real cost of living rises they experience. Cutting their adjustment for price increases would make life even more difficult for them.

Social Security expert and co-chair of the Strengthen Social Security Campaign Nancy Altman says the “chained” CPI will have a devastating effect on young workers and current beneficiaries.

The Social Security COLA cut is a betrayal by politicians in Washington of today’s 55 million Social Security beneficiaries. Indeed, it is a betrayal of the 165 million workers and their families who are earning those benefits every work day. These cuts would occur soon and they would affect everyone. Social Security does not add a penny to the deficit. Those who pledged that Social Security would not be cut as part of a deficit deal are breaking their promise if they support this proposal. So are those who have pledged that they will not cut the benefits of current beneficiaries. They will vote for this at their electoral peril.

Young people around the country have been speaking out on the fiscal showdown. Check out this roundup of blog posts and see what it means to them.

(This post first appeared on Labor’s Edge and is republished with permission.)