Chained reaction: Proposal to alter COLA computation formula draws fire

Anyone who is following the current budget debate over the last week probably has become acquainted with the term “chained CPI.”

Most people probably know that CPI stands for Consumer Price Index, and that the CPI—in its most general sense—is a measure of changes in the price of a “basket” of consumer goods and services purchased by households.  The CPI is a gauge of inflation that the powers-that-be use to calculate cost-of-living adjustments to Social Security, government annuities, etc.

So far, so good.

Chained CPI—also in its most general sense—is a different way of calculating the CPI that takes into account the fact that consumers switch to cheaper goods and services when prices rise.

Proponents of chained CPI—let’s just call it CCPI—say that the measure is a more accurate representation of changes in the price of that basket of goods than the CPI is.

CCPI opponents, a group that includes people on both ends of the political spectrum, say that the CCPI does not accurately reflect the purchasing habits of all those seniors receiving—and many living on--Social Security. They say that using it will greatly reduce Social Security payments over time.

Bargaining chip

In recent days, congressional Republican dealmakers have proposed switching to the use of CCPI to set Social Security COLAs as part of a fiscal-cliff budget deal. And now President Obama also reportedly is seriously considering the idea.

While news organizations over the last several days have been working overtime to make “chained CPI” a household phrase—or as social media types like to call it, a meme (an idea that quickly replicates itself throughout a society)—the term is old hat to those who monitor policy changes that affect retiree benefits.

Some groups—including Social Security advocates such as the 300-organization coalition Strengthen Social Security (formerly Social Security Works), and retiree advocates such as the National Active and Retired Federal Employees Association—have been sounding a warning over CCPI since at least mid-2011, when the idea reared its head during deficit reduction discussions.

And while it may have gone under most folks’ radar, the media actually did give CCPI a lot of coverage at that time, as well.

Clarion call

But this week, as the use of CCPI to calculate Social Security COLAs begins to look like a real possibility, awareness—and opposition—has ramped up much more quickly.

The American Federation of Government Employees, for example, on Dec. 17 issued a statement saying that a switch to CCPI “will do more harm than good” for federal employees and middle-class families.

“President Obama could not have picked a worse or more regressive item in the House Republican budget than the chained CPI,” AFGE National President J. David Cox Sr. said in the statement. “Chained CPI not only cuts benefits to the most vulnerable and neediest Americans, it also is less accurate than the currently used measure of inflation. And chained CPI will lead to income tax increases for working and middle class families, a direct violation of the president’s promise to protect them from any tax increases.”

Cox maintains that CPI measures currently used already understate inflation for the elderly.

“This change will cause a large hit to federal pensions, Social Security benefits, veterans’ benefits, and federal benefits to poor children and the disabled. It also will raise taxes substantially on the poor and middle class, while leaving the rich untouched.”

The union cites an analysis from the Center for Economic and Policy Research, an organization funded in part by labor groups. AFGE said that the center found that using CCPI for indexing income tax brackets “would mean raising taxes 14.5 percent for those earning between $10,000 and $20,000 a year and 69 percent of the tax increases due to chained CPI-indexing would come from households earning less than $100,000.”

The president of NARFE, Joseph Beaudoin, also took a broadside at the CCPI in a Dec. 17 letter to members of Congress.

“In addition to lowering retirement income, using the chained CPI to measure inflation would increase taxes on lower- and middle-income taxpayers,” he wrote in the letter. “The impact of these combined changes would fall hardest on those who live the longest, as their savings dwindle, and on those whose sole source of retirement income is from their government benefit, including many receiving civilian or military retirement annuities.”

Bottom line

For folks who want to take a look at a current snapshot of the issue, one of the groups cited above, Strengthen Social Security, has put together a fact sheet just for the lame duck session of Congress.

At the same time, we’d wager most people have already heard enough, and that not many folks, outside of some policy wonks and legislators and those sitting at the bargaining table, are keen on the idea of using CCPI to calculate Social Security COLAs.

We'd also wager that for many retirees, the issue may seem less about keeping the nation from going over the fiscal cliff, and more about pushing retirees over it—wearing a lead parachute.

Posted by Phil Piemonte on December 18, 2012 at 4:12 PM