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Home Press Center Press Releases Dean Baker Statement on the Chained CPI and the President's Budget

Dean Baker Statement on the Chained CPI and the President's Budget

For Immediate Release: April 5, 2012
Contact: Alan Barber, (202) 293-5380 x115

Washington, D.C.- Dean Baker, a co-director of the Center for Economic and Policy Research, released the following statement today on Social Security, the chained CPI and the President's budget:

”As reported in a number of news outlets today, the President’s budget plan will likely feature a proposal to adopt a chained CPI for the calculation of Social Security cost of living adjustments (COLA). The administration suggests this is a mere tweak to entitlements that will make Social Security benefit calculation more accurate in exchange for raising more revenue. In fact, the change amounts to a substantial cut to Social Security benefits.  

“Switching from the current index to the chained CPI would immediately begin to cut benefits and would continue to do so year after year. For an average worker retiring at the age of 65, this would amount to a cut of $650 a year by age 75. At age 85, this would be a cut of $1,130 a year.

“Using the chained CPI to calculate benefits would have a much larger impact on the income of most retirees than President Obama’s tax increases last year did on the wealthy. For a couple earning $500,000 a year, their taxes went up by $2,300 a year. That is less than 0.5 percent of their pre-tax income and a 0.6 reduction of their after tax income. Since Social Security is about 70 percent of the income of the typical retiree, switching from the current index to the chained CPI would be a reduction in income of more than 2 percent, more three times that of the tax increase to the wealthy.

“It is worth noting that Social Security in law and in practice has been kept out of budget negotiations. This makes the proposal on the chained CPI all the more unfortunate. While there will eventually have to be an agreement to address the projected long-term shortfall in Social Security’s funding, President Obama is proposing to make a cut to benefits while getting zero in terms of increased revenue for the program. This is not the approach of someone who values the Social Security program.

“Furthermore, the claim that the chained CPI provides a more accurate measure of the rate of inflation experienced by the elderly is simply not true. Seniors devote a much larger share of their income to items that have risen faster than the overall CPI, specifically health care and housing. No one has comprehensively studied the patterns of substitution by the elderly, so anyone claiming that the switch to the chained CPI is being done in the interest of accuracy is simply not being truthful.

“Unless the Bureau of Labor Statistics constructs a full elderly CPI we won’t have an accurate measure of the rate of inflation seen by the elderly. All we can know for certain is that the switch to the chained CPI is a way to cut benefits for a group of people that for the most part are already struggling.”

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