How the Chained CPI Affects Social Security Payments

Retirees are likely to get smaller monthly payments using this new measure of inflation.

Retirees are likely to get smaller monthly payments using this new measure of inflation
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Lengthy calculations. Social Security's cost-of-living adjustment is currently calculated by comparing the third-quarter average CPI to the measurement from a year earlier, and the cost-of-living adjustment based on the percent increase (if there is one) becomes payable in January. The chained CPI takes considerably longer to calculate, and the values are revised over a period of several years. To produce a January cost-of-living adjustment, an estimate of the chained CPI would need to be used, which could contain errors. "One shortcoming of the chained CPI is that it requires data which is not fully available for two years, and so the BLS publishes the chained CPI in initial and interim forms before publishing in final form with a time lag," says Ed Lorenzen, senior advisor for the Committee for a Responsible Federal Budget. The chained CPI may also underestimate the inflation senior citizens experience, perhaps because health care prices play a larger role in older people's spending. "On average, seniors spend a higher percentage of their incomes on health care than workers or the general population, and health care costs have grown, and are projected to continue to grow, at a faster rate than other goods and services," says Nancy Altman, co-chair of the Strengthen Social Security Coalition.

[Read: Places Where Workers Pay the Most Into Social Security.]

Cost savings. The Obama administration says the proposed switch to the chained CPI would reduce deficits by at least $230 billion over the next 10 years. Using the chained CPI would also eliminate between 16 and 20 percent of Social Security's long-term funding shortfall, according to Charles Blahous, a public trustee for Social Security. "Though this would represent an improvement in program finances, by itself it would not even make up for their deterioration in just the last few years," he says. For the chained CPI to be used to determine cost-of-living adjustments, Congress would need to pass and President Obama must sign a bill legislating the change.