March 13, 2013
That’s what President Obama’s aides keep saying. They generally don’t put in those terms, probably because they assume that everyone already knows, but the cut to the typical senior’s Social Security benefit from the adoption of the chained CPI would be a larger hit to their income in retirement than the increase in income taxes put in place at the start of the year is the typical affluent taxpayer.
The arithmetic on the chained CPI is straightforward. It reduces benefits by an amount that increases 0.3 percentage points each year a person is retired. This means that after 10 years the reduction in the annual benefit would be 3.0 percent, after 20 years the reduction would be 6.0 percent, and after 30 years the reduction would be 9 percent. If we assume that a typical beneficiary lives long enough to collect benefits for 20 years, their hit from the chained CPI would on average be 3.0 percent over this period.
For the typical retiree, Social Security benefits are close to two-thirds of their income. This means that the use of the chained CPI would amount to a hit to their income of approximately 2.0 percent (two-thirds of 3.0 percent).
By contrast, if we assume that a couple earning $500,000 a year is the typical household affected by the tax increase, then their additional tax burden will be 4.6 percent of their income over $450,000 or $2,300. If we assume that this couple had not unusual exemptions (or even usual ones), then their after-tax income before the tax increase would have been around $350,000. This means that the Obama tax increase would reduce their after tax income by a bit less than 0.7 percent. This means that the hit to Social Security beneficiaries from the chained CPI will be around three times as large as the hit to the typical affluent taxpayer from the Obama tax increase.
Reduction in Income:
Chained CPI and Obama Tax Increases