Yesterday, the President included Social Security cuts in his budget through a proposal called the “chained CPI”. Let’s take a minute and break down exactly what that means:

The chained CPI would modify the way the cost-of-living-adjustment (COLA) for Social Security is calculated, cutting benefits by $127 billion dollars over the next 10 years alone. That comes out to over $2000 in lost benefits for the average senior.

Some have tried to defend this unprecedented inclusion of Social Security benefit cuts in the President’s budget. Since the last Social Security package in 1983, Washington has never cut Social Security benefits. In fact, we have strong rules in place to prevent Social Security from being used as a piggy bank for deficit reduction. Yet the President’s budget choose to ignore the fact that Social Security is a separate, self-financed, off-budget program that has sufficient assets to pay full benefits for the next 20 years (and 75% of benefits beyond that time). In fact, the President blatantly breaks his earlier promise to not cut the Social Security COLA.

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Here are the facts you need to know to refute proponents of the Chained CPI:

1. Chained CPI is not a more accurate measure of inflation for seniors. The Bureau of Labor Statistics, which calculates the consumer price index (CPI), has developed a separate measure of inflation for the elderly called the CPI-E, because the current CPI actually understates inflation for seniors.
2. Adopting a Chained CPI is an imbalanced approach for Social Security. This proposal deals with a long concern about the ability of Social Security to pay benefits in the future by cutting benefits now. There is no corresponding effort to better protect benefits. Instead, Social Security benefits would decrease under a Chained CPI by a growing amount each year that will mean seniors fall further and further behind the cost of living.
3. Chained CPI disproportionally affects the incomes of those who are most reliant on Social Security, and are especially harmful for those who are lower income and live longer. So-called “mitigation” efforts, which attempt to address the rough edges of this large benefit cut, simply reinforce the fact that the cut is harmful and that the Chained CPI is not accurate.
4. It takes a political act of Congress to cut benefits as a matter of policy – something that is overwhelmingly rejected in poll after poll of the American public, across party lines.
5. Social Security should not be discussed in an overall budget package, and benefit cuts should not be used as a piggy bank for deficit reduction.  Rather, Social Security should be discussed separately from the federal budget, in the context of retirement policy, with the goal of achieving an adequate income in retirement.

So what can you do? Go to www.aarp.org/whatyoulose to calculate exactly how much your Social Security benefits would be cut – then take action. Urge your members of Congress to reject this harmful change and instead find responsible solutions that keep the promise to current seniors and future generations.

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Their proposed change, the “chained CPI,” is estimated to lower the CPI by 0.3 percentage points each year, taking approximately $112 billion out of the pockets of current and near retirees in the next 10 years alone.  A typical beneficiary – with an annual income of roughly $20,000 — will lose over $2000 dollars of benefits over 10 years. Find out how much you would lose.

The primary argument for chained CPI is that it is a more accurate measure of inflation — but in fact, the evidence suggests it’s even less accurate than the current formula.That’s because the chained CPI is based on a notion of substitution of lower cost goods by consumers when the prices of certain goods rise (e.g., when the price of beef rises, people buy more chicken).  However, there is no evidence to suggest that the substitution effect reflects the spending habits of seniors. That’s because most seniors have modest incomes and have less opportunity for substitution because they are already choosing lower priced goods, and many costs for seniors (e.g., health care, utilities) do not have lower price alternatives.

In addition, the current measure for Social Security – the CPI-W formula – is based on the spending patterns of workers, not retirees.  As a result, the current CPI under-reports the rapidly increasing health care costs experienced by seniors. The CPI-E, an experimental index that re-weights the index to reflect senior’ spending habits, shows that the CPI-W on average under-reports inflation by 0.2 percentage points each year.  As such, the evidence suggests the current COLA is already lower-than-warranted for seniors.

The adoption of the chained CPI is likely to further erode seniors’ standard of living. A chained CPI makes sense only in a budget deficit driven world, where accuracy takes a back seat to benefit cuts for the purposes of deficit reduction.

David Certner is the Legislative Counsel and Director of Legislative Policy for Government Affairs at
AARP.

Congress and the Administration are considering, as a means of deficit reduction, a legislative change to the consumer price index – the so-called “chained CPI.” This change would have a particularly negative impact on Social Security benefits – here’s why:

1. Chained CPI compounds over time. 
As a result of a chained CPI, there will be a 0.3% annual cut in Social Security cost of living adjustments (COLAs). Since this compounds over time, it would end up cutting the equivalent of one full month of benefits each year from a 92-year-old beneficiary. And it’s not a small cut overall – Social Security loses $112 billion over the next 10 years.

2. The greatest impact will be on the most vulnerable older Americans.
As retirees age, they have less income, fewer financial assets, and are more dependent on Social Security. Specifically, women tend to live longer than men and tend to have lower incomes, so women and poorer households are more at risk of falling into poverty with any cuts to Social Security.

3. Benefits for disabled and retired veterans would be cut.
3.2 million disabled veterans and another 2 million military retirees would see their benefits cut if chained CPI is adopted. Permanently disabled veterans who started receiving disability benefits at age 30 would see their benefits cut by more than $1,400 a year at age 45, $2,300 a year at age 55 and $3,200 a year at age 65.

4. Chained CPI is a less accurate measure of inflation
Since retirees spend much more on medical care than working-age Americans, the current CPI calculations already underreport the rapidly increasing health care costs experienced by seniors. Moving to a chained CPI would exacerbate the gap between formula and actual costs.

5. Social Security does not drive deficits, and should not be cut as part of a budget deal.
Social Security is a separately financed, off-budget program – it is not a driver of deficits in the rest of the budget. Any changes to Social Security should be handled separately, not as part of a budget deal that focuses on near-term savings that harm current retirees.