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Chained CPI Will Reduce Social Security Benefits to Large Number of Recipients

Author: Crowe & Shanahan

Published: 2013-06-03

Synopsis and Key Points:

Chaining consumer price index to economic phenomenon called substitution bias may reduce Social Security benefit payments next year.

Main Digest

Proposed changes may reduce Social Security benefit payments next year - Chaining the consumer price index to the economic phenomenon called substitution bias will reduce Social Security benefits to hundreds of thousands of recipients.

Substitution Bias - Describes a bias in economics index numbers arising from tendency to purchase inexpensive substitutes for expensive items when prices change. Substitution bias occurs when two or more items experience a change of price relative to each other. Consumers will consume more of the now comparatively inexpensive goods and less of the now relatively more expensive goods.

In an effort to reduce the federal deficit, the U.S. government is attempting to implement savings techniques for the 2014 budget. One of the proposed changes could save the nation hundreds of billions of dollars over the next decade through the concept of "chained CPI." Unfortunately, chained CPI may reduce the amount of Social Security benefits received by thousands of recipients in Missouri, Illinois and across the nation.

What is chained CPI

The consumer price index (CPI) is the economic measurement used to calculate the rate of inflation by tracking changes in the prices of consumer goods, such as groceries, housing, clothing and transportation. The federal government uses CPI to calculate benefits like Social Security Income (SSI), Social Security disability (SSD) and pension payments, and to determine income tax brackets. As the overall cost of these consumer goods rises, so does the rate of inflation.

As prices rise for certain items, consumers substitute less expensive items for those they normally purchase, lessening the impact of inflation on their daily living expenses. This is called "substitution bias."

The government is proposing to chain the CPI to the economic reality of substitution bias and, in effect, reduce the perceived rate of inflation. While this may be good for deficit reduction, it is not good for those who rely on federal benefits for their income.

Effects of chained CPI

Since chained CPI creates a slower rise in the inflation rate, periodic adjustments to SSI and SSD payments will rise more slowly as well. Additionally, chained CPI will cause a slower increase in the standard tax deduction and tax bracket cutoffs, pushing some taxpayers into higher tax brackets. Unfortunately, seniors often do not have less expensive purchasing options, especially when it comes to medical treatment and health care costs, making the financial effects of chained CPI worse.

Social Security's cost of living adjustments (COLAs) barely keep up with actual costs experienced by benefit recipients. According to a social action organization called Social Security Works, the average worker receiving Social Security benefits may receive as much as $5,000 less in a ten-year period. Like inflation, the effect is cumulative and, the longer recipients live, the less they receive as they age when compared to the actual cost of living.

A lawyer can help

If you suffer from a disability, have an experienced attorney on your side. A lawyer knowledgeable about Social Security claims may be able to help you submit a claim, appeal a denial or help you receive all to which you are entitled.

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