Proposed Changes to the Inflation Index

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One of the many proposed changes that is being considered to help resolve the current budgetary issues is to change the index used to adjust Social Security benefits from the current method, using the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, to a much more conservative index known as the Chained Consumer Price Index for all Urban Consumers (or C-CPI-U).  (See this article on How Social Security COLAs are Calculated for more information.)

Unfortunately, the reason behind making this is change is the fact that it will ultimately save money for the Social Security system, directly at the expense of the beneficiaries of that system.  Here’s what you can expect:

As an example, the CPI-W indicates a year-over-year increase from June 2010 to June 2011 of 4.1%.  Over the same period, the C-CPI-U only shows an increase of 3.4%.

This is due to the factors used in calculating the C-CPI-U, which considers that as inflation increases, spending on certain items will decrease, since consumers will purchase cheaper items or less quantity of items as the prices increase.  The Bureau of Labor Statistics, who tracks these things and comes up with the indexes, suggests that the chained index more accurately reflects the way real-live consumers operate with regard to inflation.

Estimates by the actuaries for the SSA indicate that this change could result in a $1000 per year reduction of benefits (or actually, forgone benefit) by the age of 85.  The estimate is that over any 30-year span, using the C-CPI-U instead of the CPI-W would result in a 10% lower total benefit being paid out.

Each year’s increase, if this new index is put into place, is anticipated to be two- to three-tenths of a percent lower than the increase would have been under the current index.

The change in index is not only proposed for Social Security benefits but also for certain tax provisions as well, such as standard deduction, and tax rate tables.  In both cases, the taxpayer (at all levels, not just the “rich”) will be impacted negatively.

As always, the only way to try to impact this is to contact your representatives in Congress and let them know that you’re not in favor of having your miniscule increases reduced further in the name of budget cutting.  There are plenty of places where pork can be removed from the budget before hitting our seniors with this, in my opinion…