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You might have heard that President Obama’s budget proposal released today contained a change to Social Security benefits. [1] Social Security benefits are currently indexed to the standard inflation rate, aka Consumer Price Index for All Urban Consumers (CPI-U). The proposal is to change the inflation to the “Chained Consumer Price Index.” The Chained index includes more “substitution” than the regular index. Substitution is when one object increases in price, the assumption is that the consumer will switch to a different object with lower pricing. For example, switching from beef to chicken.

The Bureau of Labor Statistics has been tracking the Chained CPI for a number of years. It runs about 0.2% lower than the regular inflation each year. Going forward, this would lower the cost of living increases paid out to Social Security recipients.

What is less well known is that the Bureau of Labor Statistics has a separate inflation measurement, just for seniors. It is called CPI-E. Since the majority of Social Security recipients are senior citizens, you might ask why SS benefits are NOT indexed to this inflation measure. The answer most likely is because senior inflation is running about +0.2% HIGHER than the standard inflation measure. Seniors are currently being under compensated for inflation.

BOTTOM LINE is that the proposal for Social Security inflation is proposed to go in the wrong direction, at least from a fact standpoint. If you want to argue benefits should be cut for some other reason that is a separate argument to make. One other important point: before the president released his budget, the leading proponents of using the chained CPI were Republicans. It appears that seniors are being attacked by both parties.



[1] President Obama Proposed 2014 budge, containing chained CPI for Social Security

[2] Bureau of Labor Statistics- Consumer Price Index for the elderly
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