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This week's Defender's of Social Security Blogathon prompted me to try to find something that would allow me to explain clearly, concisely and completely to others why chained CPI is so harmful. What I found is a paper from the Center for Economic Policy and Research titled, "The Chained CPI: A Painful Cut in Social Security Benefits and a Stealth Tax Hike".

Not only do they clearly explain why chained CPI hurts seniors, but also how it raises income taxes on low and middle income taxpayers (something I did not know).

Follow me below the fold for the highlights...

The Bureau of Labor Statistics calculates the CPIs -- there's more than one. The CPI - U is used for income tax bracket calculation, while the CPI - W is used to determine the yearly change in benefits for Social Security to keep pace with inflation

Some politicians (including our President apparently) are calling to change how the cost of living increases are calculated, switching to chained CPI to calculate changes in both Social Security benefits and income tax bracket calculations.

The Center for Economic Policy and Research makes 3 points why this is a bad idea:

1. Switching to the Chained CPI would result in cuts to already modest Social Security benefits.
2. It is likely that the Chained CPI is not an accurate measure of the inflation rate seen by seniors.
3. The Chained CPI would lead to income tax increases for working Americans.

Taking these one at a time:

1. Switching to the Chained CPI would result in cuts to already modest Social Security benefits.

Social Security benefits are already quite modest. In 2012, the average annual benefit for beneficiaries aged 65 and older was less than $15,000. Any additional reduction of benefits would have serious repercussions for retirees, 2-out-of-5 of whom rely on Social Security for 90 percent of their retirement income.

The Chained CPI is relatively new and has only been calculated by the BLS since 2002.
It has shown a rate of inflation 0.3 percent lower than the current index used to calculate Social Security’s annual cost - of - living adjustment. Over time, changing to the Chained CPI would result in significant cuts to Social Security benefits: a cut of roughly 3 percent after 10 years, about 6 percent after 20 years, and close to 9 percent after 30 years. In addition, lower-income retirees would lose much larger
proportions of their income than wealthy ones.

What this means in dollars for a 65 year old retiree is a reduction of $650 in yearly benefits by age 75 and a reduction of $1,130 in yearly benefits by age 85.

2. It is likely that the Chained CPI is not an accurate measure of the inflation rate seen by seniors.

The Bureau of Labor Statistics has found that seniors spend proportionally more of their income on medical care and housing, which in addition to rising more rapidly than most other costs, are also much harder to substitute with other products. This research suggests that a CPI based on living costs of the elderly would actually show a higher, not lower, rate of inflation.
In other words, we should be increasing Social Security benefits -- not reducing them -- if we want seniors to keep up with their actual cost of living.

3. The Chained CPI would lead to income tax increases for working Americans.

The Chained CPI would also effectively raise taxes on virtually all working Americans, especially middle and lower income families. By applying it to all government programs, including the annual adjustment in income tax brackets, the Chained CPI would cause those thresholds to rise more slowly than they do now. That would lead to incomes jumping up to higher tax brackets faster, or in other words, income tax increases.
I did not know this. The report goes on to say:
According to Congress’ Joint Committee on Taxation, if individual income taxes were indexed to the Chained CPI starting in January 2013, by 2021, 69 percent of the gains in revenue would come from taxpayers with incomes below $100,000, while those in the highest income brackets would barely be affected.
The entire report is worth reading, and don't forget to sign the petition telling Obama #noSScuts, please share.

https://petitions.whitehouse.gov/...

Originally posted to dave1042 on Mon Mar 25, 2013 at 12:33 PM PDT.

Also republished by Social Security Defenders.

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