How Would the Chained CPI Affect Social Security Benefits?

April 23, 2013 at 1:48 pm

Most future Social Security beneficiaries would experience a benefit cut averaging about 2 percent over the course of their retirement from the President’s proposal to adopt the chained Consumer Price Index (CPI) for computing Social Security’s cost-of-living adjustments, our brief report explains:

  • For beneficiaries receiving an average benefit, the reduction would average 1-2 percent.
  • For beneficiaries receiving smaller-than-average benefits, the reduction would be smaller, likely in the 0.5 percent to 1.5 percent range — except for beneficiaries poor enough to qualify also for Supplemental Security Income (SSI), who would be held harmless.
  • For beneficiaries receiving higher-than-average benefits, the reduction would be larger, averaging 2 percent or slightly more.

The proposal includes features to mitigate its effects on low-income and older beneficiaries:  a benefit “bump” that phases in gradually between ages 76 and 85 (as well as a second increase between ages 95 and 104).  It also exempts means-tested programs — notably SSI for very poor seniors and people with disabilities — from the switch to the chained CPI.

The graph shows how the proposal would affect three illustrative future retirees. Shifting to the chained CPI would reduce annual cost-of-living adjustments (COLAs) by about 0.25 percentage points a year for all three, according to Congressional Budget Office projections.

The cumulative impact of this reduction would grow over time but would be offset by the benefit bumps beginning in a recipient’s 70s and 90s.

Current beneficiaries would suffer smaller losses than future beneficiaries at any given age.  Current beneficiaries now 69 or older receiving an average benefit would receive lower benefits than under current law for the first ten years, but generally would receive higher benefits than under current law in years after that.  After 15 years, the cumulative change in benefits for the average current beneficiary would be near zero.  Current beneficiaries receiving smaller-than-average benefits would come out ahead if they lived more than ten or 15 years.

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More About Paul N. Van de Water

Paul N. Van de Water

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Medicare, Social Security, and health coverage issues.

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4 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    I think we need to face the harsh reality that the time for cuts across the board have come if we have hopes of salvaging social security benefits. The math just doesn’t add up to keep going the way we are. Doesn’t matter what political stance one takes. Our choice of action in this matter has been taken away. Let it fail or make cuts. This looks like a good and smart start to me.

  2. wkj #

    I can’t reconcile your graph with your narrative. The narrative refers to a 2% maximum annual reduction for high income beneficiaries. However, the graph shows a (roughly) $900 annual reduction between age 75 and 85 for the high income beneficiary, which would be a 3+% reduction (900/28,800 = 3.125%). The annual reduction shown in the graph at age 94 for such a beneficiary is nearly $1,500, which would be a 5+% reduction (900/28,800 = 5.2%).

    What am I missing?

    • CBPP #

      Your math is roughly correct. Our statement that “For beneficiaries receiving higher-than-average benefits, the reduction would be larger, averaging 2 percent or slightly more,” though, focused on the average reduction during such beneficiaries’ entire retirement. We estimate that’d be 2.1 percent if the retiree lives to age 81 (which is pretty typical), 2.5 percent if he or she lives to 91. Check out Table 1 in the full paper (which is linked in this post) for those figures.

  3. Doug S. #

    Given the shrinking number of Americans with private pension plans and the very modest amounts most folks have in their IRAs or similar retirement funds, why is a Democrat proposing any reduction in social security benefits? And how will these proposals enhance the electoral prospects of the only party which even pretends to care about working families and the middle class? Obama should be ashamed.

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