Is Chained CPI a 6 Percent Benefit Cut or a 25 Percent Benefit Increase?

With the President proposing switching to the chained CPI to measure inflation, the attack dogs are out. We've written on the merits of moving to the chained CPI many times before, showing both that it is a more accurate measure of inflation and that it would reduce the deficit by almost $400 billion.

Yet in the last couple of weeks, discussion over this policy has escalated substantially. In the past, there have been some misleading claims about the chained CPI that we have addressed repeatedly.

One claim, though, merits discussion and consideration -- that even though chained CPI has only a tiny effect in the first year it would represent a large benefit cut in the future. Social Security Works, for example, has argued that "After 20 years, your benefits would be cut by about $1,000 a year," and Center for Economic and Policy Research co-director Dean Baker said "For an average worker retiring at the age of 65, this would amount to a cut of $650 a year by age 75. At age 85, this would be a cut of $1,130 a year."

So would chained CPI cut benefits? As it turns out, it depends on what you are measuring against. Here are a few ways to think about it:

  1. Nominal Benefits Grow. Importantly, under chained CPI, nominal benefits will continue to grow year after year. No one will see the dollar value of their benefits go down -- instead they will continue to go up at a modestly slower pace. By our estimates, an individual's benefits will rise by 60.5 percent over 20 years under chained CPI, compared to 67.9 percent under the current CPI-W measure.
  2. Real Benefits Stay Constant. Switching to chained CPI would mean constant real benefits for seniors. Currently, the inaccurate measure of inflation we are using means a modest increase in real benefits over time. But the purpose of cost-of-living adjustments (COLAs) is to maintain the value of benefits over time, and the chained CPI would accomplish that.
  3. Real Benefits for an 85 Year Old Grow. Another comparison of real benefits would be between an 85-year old in 2013 and one in 2033 (assuming both retire at age 65). In this case, despite the switch to the chained CPI, real benefits for the latter beneficiary would be higher because the growth in initial benefits, which essentially grow with wage inflation, outweighs the slower growth of the chained CPI. Specifically, benefits for the latter 85-year old would be 8.2 percent higher than the present-day 85-year old.
  4. Scheduled Benefits Decline. The measure that chained CPI opponents generally focus on is a comparison to scheduled benefits, which ignores trust fund solvency issues and assumes that funds are shifted around to ensure that Social Security pays full benefits. Under this measure, the chained CPI reduces benefits 20 years out by 5.4 percent.
  5. Payable Benefits Increase. By contrast, "payable benefits" takes into account trust fund insolvency and the automatic benefit reduction that accompanies it. Considering that the trust fund is projected to be exhausted in 2033, at which point beneficiaries would receive a nearly one-quarter benefit cut, benefits under the chained CPI would be 24.8 percent higher than under the payable-benefit scenario.

The graph below compares nominal benefits with scheduled benefits, payable benefits, the chained CPI without adjustments, and the chained CPI with an old-age benefit bump-up.

Source: Social Security Administration

In short, whether the chained CPI would reduce, increase, or keep constant benefits depends on which measure one thinks is accurate to use as a baseline. But in any case, switching to chained CPI would represent a move to more accurate measure of inflation and in the process would close 20 percent of Social Security’s funding gap. See our other blogs on chained CPI here, our paper here, and a “one-pager” on the policy here.