What is the Chained CPI and Why It’s a Bad Idea

 By Harry S. Margolis


There’s a move afoot in Washington to change the way annual cost of living adjustments (COLA) are made in Social Security and Supplemental Security Income are calculated, that would reduce this protection against inflation.  Many critics already charge that the current method of calculating the COLA already understates inflation for seniors because it is based on living expenses for younger people who have much lower health care expenses, which have been increasing faster than other costs for decades.


The so-called chained CPI would further reduce the annual COLA because it is based on the assumption that if the cost of an item increases, you won’t simply pay the higher cost, but instead you will substitute a less expensive alternative.  So, your cost of living may not actually go up as fast as prices increase.  For instance, if Starbucks raises the cost of a cappucino, you may buy a regular coffee or go to Dunkin Donuts instead.


The problem with using this measure, however, is that many seniors depending on Social Security or SSI are already buying their coffee at Dunkin Donuts (to continue the analogy) and don’t have the option of substituting a lower cost alternative.  Instead, they would have to give up coffee all together (again, continuing our analogy).  


Experts say that switching to the chained CPI would have only a very small effect on benefits in the first few years after retirement, but that the effect would increase with every year that goes by, as the reductions add up.  This especially means balancing the budget on those who can least afford it because low-income seniors are both the most likely to rely heavily on Social Security for their support and are most likely to be adversely affected by the fact that their other sources of income don’t keep up with inflation.


There are much more fair ways to make the small adjustments necessary to keep Social Security solvent indefinitely.  One that I have espoused for many years (and haven’t heard anyone else discuss) is to cap the annual COLA by a specific dollar amount, perhaps $25 a month.  This would affect those receiving a higher Social Security benefit and not those receiving smaller amounts each month.   


For instance, someone with a $1,000 a month in Social Security benefits would be limited to a 2.5% COLA while her neighbor receiving $500 a month would not run up against the limit until inflation reached 5%.  This change further reinforces the progressive nature of Social Security benefits, unlike the chained CPI.


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