Frankly I had never heard of the 'chained consumer price index' until yesterday. If you have not - it's probably time to learn. By using this measure the politicos can 'cut' social security benefits, without actually technically using the word 'cut'. Genius.
Larger picture - the U.S. plan to deal with the massive deficits is to devalue the dollar ... which will create ever more inflation as the year pass. That increased inflation can be under reported even further [May 22, 2008: Bill Gross - Inflation Underplayed] using such snazzy measures as the 'chained consumer price index'. Which will allow the powers that be to claim there is little to no inflation (hence you get no COLA adjustment) as they devalue the country's currency to pay off our debt. I love it when a plan comes together.
Did I mention it's genius?
- Once considered untouchable, Social Security is now in play in the debt-ceiling negotiations. And that could mean higher income taxes for many U.S. families in addition to shaved benefits for tens of millions of retirees as they age. Low- and middle-income families could be hit.
- Adopting a new inflation measure would allow policymakers to gradually cut benefits and increase taxes in a way that might not be readily apparent to most Americans. The inflation measure under consideration is called the Chained Consumer Price Index. On average, the measure shows a lower level of inflation than the more widely used CPI.
- A Chained CPI assumes that as prices increase, consumers buy lower cost alternatives, reducing the amount of inflation they experience. (so does CPI) For example, if the price of beef increases while the price of pork does not, people will buy more pork. Or, as opponents mockingly argue, if the price of home heating oil goes up, people will turn down their heat and wear more sweaters
- The change would mean smaller annual increases in Social Security payments, government pensions and veterans' benefits. Current payments would not be affected, but recipients would get smaller increases in the future.
- Overall, the proposal would cut Social Security benefits by $112 billion over the next decade, according to the nonpartisan Congressional Budget Office. It would cut government pensions and veterans' benefits by $24 billion over the same time period if adopted for them as well.
- In most years, Social Security payments are increased based on a measure of inflation called the Consumer Price Index for Urban Wage Earners and Clerical Workers. If Social Security adopted the new measure, annual increases would be 0.3 percentage points smaller, according to the program's actuaries. (doesn't seem like much but this compounds over time... )
- That could be a tough hit for seniors who have gone two years without a cost-of-living adjustment.
- As the possible cuts are phased in, a typical 65-year-old who started receiving Social Security benefits at age 62 would get an annual reduction of about $130, according to an analysis of data produced by the Social Security actuaries. By the time that retiree reached 75, the annual cut would be $560. At 85, the cut would be $984 a year.
- Average Social Security benefits are about $1,100 a month, or about $13,000 a year.
- Adopting the Chained CPI would mean smaller adjustments to the tax brackets, leading to higher taxes for people at just about every income level. Low-wage workers would eventually see the biggest increases, while high-income taxpayers would see only small changes. For example, by 2021, taxpayers making between $10,000 and $20,000 would see a 14.5 percent increase in their income taxes with a Chained CPI, according to an analysis by the Joint Committee on Taxation. Taxpayers making more than $500,000 would get a tax increase of 0.3 percent, while those making more than $1 million would get a tax increase of 0.1 percent.
[Apr 23, 2008: Barry Ritholtz on Disappearing Economic Indicators]
[May 10, 2008: Finally Some Mainstream Reports are Figuring Out the Spin from Government]