President Obama looks to reduce Social Security cost of living increases with 'chained CPI'

President Obama's new budget proposal -- which will be formally unveiled next week -- includes a move to slow payments to Social Security.

President Barack Obama is hunting big game. His budget proposal -- which will be formally unveiled next week -- is seeking a grand bargain of taxes on the rich and spending cuts. But perhaps the most controversial measure in his proposal is a move to slow payments to Social Security.

So, get ready to hear lots of talk about "chained CPI." That’s wonk talk for altering how inflation is measured when the federal government cuts checks for Social Security, or veteran benefits. 

University of Pennsylvania Economist Olivia Mitchell says imagine you’re grocery shopping.

"If the price of a breakfast cereal went up, people might substitute the generic brand instead," he says, "and so the chained CPI takes into account that people do do those substitutions."

Bottom line: Moving to chained CPI would slow annual cost of living increases by a fraction. Over a decade, that would cut federal spending by $130 billion and generate roughly the same in tax increases.

Paul Van de Water, an economist with the Center on Budget and Policy Priorities, says most taxpayers lose less than 1 percent of their after tax income in year 10 of chained CPI -- and the average person on social security would lose $350. 

"For a lot of people it’s not going to make a noticeable difference," says Van de Water.

If that’s really the case, then chained CPI may become a political reality.

About the author

Dan Gorenstein is the senior reporter for Marketplace’s Health Desk. You can follow him on Twitter @dmgorenstein.

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