Calculating COLA for Social Security Using Chained CPI Would Wipe Out 2012 Increase

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Written by David Rosnick   
Wednesday, 19 October 2011 14:00

With the release of the September price data, we now know the 2012 cost-of-living adjustment (COLA) for Social Security and Supplemental Security Income benefits. From the third quarter of 2008 to the third quarter of 2011, the Consumer Price Index for Urban Wage Earners (CPI-W) rose 3.6 percent. That means a retiree receiving $1,115 each month would receive an additional $482 in annual benefits in 2012.

Recently, some on the campaign trail and in D.C. have proposed calculating the COLA based on the chained CPI (C-CPI-U) rather than the CPI-W. Proponents argue that the CPI-W overstates inflation, making the switch to the chained CPI a merely technical change.  The purpose of the switch, however, is to reduce benefits.

If this policy were in place today, beneficiaries would receive only a 2.8 percent COLA next year. Compared with current law, a retiree who received $878 per month in 2001 would, in 2012, see his/her annual benefit decrease by $462 (3.3 percent) under the chained CPI. A CEPR report back in September found that these changes would mean a decrease in benefits of 3 percent in 10 years, 6 percent in 20 years and 9 percent after 30 years of retirement. If the COLA had been calculated for the last 11 years using the chained CPI, it would effectively wipe out the 2012 increase.