Chained CPI and You: A Primer

[cali]

As budget negotiations heat up, you're probably going to hear a lot of talk about "correcting the measure of inflation" or "chaining the CPI." Don't let your eyes glaze over, though, because this might be one of the most important proposals in the whole budget. It's also one of the most complicated for non-wonks to understand, and it just might become the most controversial.

The budget that President Obama introduced today calls for "$230 billion in savings from using a chained measure of inflation for cost-of-living adjustments throughout the Budget." Because the measure of inflation is so important when it comes paying Social Security benefits and setting tax rates, a minor technical change could have a huge ripple effect on the economy. But what does it actually mean? First, let's look at what Chained CPI is and then you'll see why switching from the old method will have such a profound impact on Americans.

<snip>

So why would progressives be upset? Because that spending comes mostly out of the pockets of poor people and retirees. Social Security mandates that benefits to seniors increase each year based on the CPI. A lower CPI number means lower benefits increases, which means smaller checks than under the old method.

<snip>

But that's not only thing the government uses CPI for. It's used to adjust income thresholds for government assistance programs, phase-out levels for certain tax credits, the standard deduction you can take on your tax return each year, even the size of the tax brackets themselves. If the amount of money needed to move you into the next highest tax bracket doesn't rise as fast as your income does, you could get bumped into the higher rate faster than you would have under the old CPI. Studies have shown the cost of the switch will be borne almost exclusively by seniors and those making under $100,000 a year. (i.e., the people who can least afford it.)

In a way, switching to Chained CPI is both a spending cut and a tax increase at the same time, with an added benefit for politicians that you don't have to actually get caught voting for either. This original argument for switching said it "should not be regarded as a benefit cut or a tax increase." Supporters of the move prefer to call it a "correction." But if you're the one receiving the checks, it definitely feels like a punishment.

http://www.theatlanticwire.com/politics/2013/04/what-is-chained-cpi/64083/

[RedEarth]

1. It's a ripoff....

I'm very disappointed that Obama proposed doing this. I also get worn out by people referring to SS as an entitlement...it's not, it's money me and my employers had been contributing to for over forty years.

I'm not necessarily a big fan of Malcolm Berko, but what he said about SS is spot on.

"Dear SG: Stop referring to Social Security as an “entitlement.” SS is not an entitlement. Every time you or your spouse earned a paycheck, the employer sent Social Security 6.2 percent of it to an account under your or her name. And each time you or your spouse earned a paycheck, the employer also sent SS a matching amount to your account. That's 12.4 percent per paycheck, and your spouse never received a shilling of it. You earned it! You paid for it! It's your money! It's not an entitlement!

The word “entitlements” is government-speak for the federal programs from which lots of folks receive support that they don't pay for. However, Congress is ill-advised to call Social Security an entitlement. Calling SS an entitlement is purposefully disparaging. And as Congress continues to call SS an entitlement, folks like you, who have 40 years of contributions, will begin to believe it's an entitlement, making it easier for Congress to take it from you.

Assume your average annual income between 1968 and 2008 was $35,000 a year.

In those 40 years, you and your employer probably contributed $5,250 annually to your Social Security account. That's $210,000. If these contributions were compounded at 4 percent annually for the 40 years, your SS account would be worth about $625,000.

Do you consider this an entitlement? I don't! It belongs to you! Some of it's even taxed. Entitlements are not taxed. Take your checks as long as the Social Security Administration sends them to you.

If you kick the bucket at age 83, then what hasn't been paid to you accrues to SS. Be mindful that the average life expectancy in the U.S. is 79 years, so most retirees collect benefits for less than 15 years. And there's a lot left over.

During the past 50 years, more than 100 million workers have been putting billions every year into the system. I've tried to find out how much all employees and employers have contributed to the Social Security Trust Fund since 1963. The Congressional Budget Office can't tell me. The Social Security Administration either won't or can't tell me. But an educated guess places the number between $53 trillion and $58 trillion. And if a half-trillion a year has been paid out each year during the past 50 years (extremely high), then $18 trillion to $23 trillion is missing. Ask your congressperson where the money is, because $18 trillion or $23 trillion is a lot of money."

[Cal Carpenter]

2. Kick.