Chained CPI Cuts Social Security Benefits while Raising Taxes on Lower- and Middle-Income Workers

A leading deficit reduction proposal is to "tweak" the official inflation measure used to annually adjust Social Security benefits, other government programs, and income tax brackets.

Proponents of this proposal argue that a relatively new inflation measure, the Chained CPI, is more accurate than the current index and the decrease in benefits to the programs affected would be balanced by increased tax revenue from the wealthy. A new issue brief from the Center for Economic and Policy Research (CEPR) examines these issues and finds the opposite to be true.

The issue brief, "The Chained CPI: A Painful Cut in Social Security Benefits and a Stealth Tax Hike," points out that switching to the Chained CPI would result in cuts to already modest Social Security benefits. As well, the Chained CPI is likely not an accurate measure of the inflation rate seen by seniors. Finally, the brief shows that the Chained CPI would result in a proportionately larger increase in income taxes for lower- and middle-income Americans than for those in the top tax brackets.

As a measure of inflation, the Chained CPI has shown a rate of inflation 0.3 percentage points lower than the current index used to calculate Social Security annual cost-of-living adjustments. This slower rate would add up over time: 10 years after switching to the Chained CPI, Social Security benefits would be 3 percent less; after 20 years there would be a 6 percent cut; and after 30 years the cut would be 9 percent. The change to the Chained CPI would also cut benefits for veterans, low-income children, people with disabilities and many others who rely on government programs.

Since seniors' expenses differ from those of the general population, the Chained CPI is not a more accurate measure of inflation for retirees, as is often claimed by proponents of switching indexes. An experimental elderly index constructed by the Bureau of Labor Statistics tracks seniors' actual costs and shows a more rapid rate of inflation than the currently-used index. A main factor is that seniors spend significantly more on housing and medical care, whose costs are rising faster than those of other goods and services.

"The Bureau of Labor Statistics' experimental elderly index more accurately tracks the consumption patterns of the elderly, and it shows that inflation for seniors is actually higher, not lower, than the current measure," said Nicole Woo, Director of Domestic Policy at CEPR. "If accuracy is indeed a concern, the BLS could construct a full elderly index for annual Social Security cost-of-living adjustments."

The argument that a reduction in benefits would be offset by an increase in tax revenue from high-income earners also falls short. Switching to the Chained CPI to adjust annual income tax brackets would lead to incomes jumping to higher brackets faster, or in other words, tax increases. Congress' non-partisan Joint Committee on Taxation showed that if income taxes were indexed to the Chained CPI starting in January of 2013, by 2021, 69 percent of the gains in revenue would come from taxpayers with incomes below $100,000. Those taxpayers with incomes between $10,000 and $20,000 would see an increased tax burden of 14.5 percent while those with incomes over $1,000,000 would only see their taxes go up by 0.1 percent.