Why the Chained CPI Fight Matters, in 3 Charts (Plus a Bit of Math)

The White House won't include the chained CPI as a cost-of-living adjuster in its next budget. Here's why that's a big deal.

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The White House said Thursday it would not be using the chained CPI (consumer price index) in its proposed 2015 budget. This move represents an about-face from last year's budget, which did include the index. The White House explained that Republicans have failed to offer any concessions in the form of closing tax loopholes in exchange for using the chained CPI.

To many Americans, this news may be meaningless, but to people receiving federal benefits – particularly the tens of millions receiving Social Security benefits – the chained CPI has become a highly charged issue.

The seemingly arcane concept has taken center stage because it has implications for both the deficit and many Americans’ monthly benefit checks.

The question Obama faced in his budget was which version of the CPI to use in cost-of-living adjustments for Social Security and other benefits. The CPI allows economists to track changes in the prices of goods. The government currently uses a measure called CPI-W (short for “consumer price index for urban wage earners and clerical workers”) to adjust benefits for Social Security so that payments keep up with rising prices. The government also uses CPI-U, the index for consumers in urban areas, to adjust in other areas like income tax brackets.

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Some have advocated for using the chained CPI-U instead, a measure that takes into account consumer substitution – if you regularly buy lots of apples but the price shoots up, you might switch to a cheaper option like bananas, for example. Because consumers make these sorts of less-costly substitutions, this CPI posts smaller gains. The below chart shows the growth in the CPI-W versus the chained CPI, with December 1999 set at 100 for both series.

That gap means using the chained CPI would create smaller benefit payments, meaning smaller government payouts, meaning smaller deficits.

The gap between the two increases over time, and the gap between what beneficiaries would have received under CPI-W versus what they would receive under the chained CPI likewise would grow. The AARP has a clear explainer of this on its website, but the short version with updated numbers is this: The average benefit for a retired worker is about $1,300 right now, and the cost-of-living adjustment for this year was 1.5 percent. If your monthly check last year amounted to $1,300, your check now would be about $1,319.50. Under the chained CPI, however, the adjustment would have been 1.25 percent, meaning a monthly check of $1,316.25.

That tiny $3 gap would grow less tiny with each successive year, as the CPI-W continues to outstrip the chained CPI. As the nonpartisan Congressional Budget Office estimated in 2013, the gap for a 73-year-old on Social Security for 10 years would be 2.5 percent, and the gap for a 93-year-old on Social Security for 30 years would be 7.2 percent. For perspective, 7.2 percent is nearly $94 of $1,300 – a big difference for a senior depending on those benefits.

Smaller checks for beneficiaries, however, mean big government savings, particularly for a graying population. The CBO also estimated last year that using the chained CPI for mandatory spending programs and the tax code would reduce the deficit by $3.4 billion in one year’s time, and that figure would grow every year, reaching $69.3 billion in 2023.

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It’s not just about dollars and cents; it’s an issue that carries ever-heavier political weight as the issue of monthly benefit checks impacts a growing segment of the population. The number of Social Security beneficiaries is ever-growing and has accelerated in recent years as baby boomers have started to retire. As that trend continues, Social Security’s rolls will swell, meaning more and more people taking interest in the issue.