What is the Chained CPI and What Could It Possibly Mean For Those Receiving Social Security Disability Benefits?

Why are we even talking about a “Chained CPI”? Where did it come from?

Chained CPI is a phrase that has been popping up lately due to the “Fiscal Cliff” of 2013. The Fiscal Cliff is coming due to a set of laws that will go in effect starting midnight on December 31st. You can find more in-depth details at the end of this post where we link relevant articles.

For the sake of moving forward and understanding what a “Chained CPI” is and what it means for those receiving Social Security disability benefits, just know that due to all these new laws there are over 1,000 government programs in line for cuts.  A “Chain CPI” is one of the solutions being discussed to avoid going over the Fiscal Cliff.

Okay got it. What is the Chained CPI? 

As we’ve covered on this blog before, each year increases in Social Security payments are based off the Cost of Living Adjustment. This adjustment is based off the Consumer Price Index of Urban Wage Earners and Clerical Worker, which is also known as CPI-W.

This Price Index is used to calculate inflation experienced by consumers. This inflation is taken into account each year and Social Security payments are adjusted accordingly. The CPI-W and the “Chained CPI” differ in how they calculate inflation. Below Donna Meltzer, CEO of the National Association of Councils on Developmental Disabilities, explains how:

The chained CPI has one important difference from the CPI-W: the substitution effect. The substitution effect says that if the price of a good or service goes up, people will substitute a cheaper product in its place. A common example is that if the price of beef goes up and the price of chicken does not (or goes up less), a person will buy more chicken and less beef. As a result, the person’s day-to-day living expenses do not go up as much as might be predicted by the increase in the cost of beef. The current CPI-W already accounts for some types of substitution. The chained CPI tries to account for more. But for seniors, people with disabilities, and other low-income Americans, the chained CPI is likely less accurate than the current CPI-W and could cause real hardship.

What does all of this mean for people receiving Social Security disability payments?

We’ll go back to Ms. Meltzer again:

Additionally, while cuts from the chained CPI start small, they get bigger every year. Remember how compound interest is supposed to make our 401(k)s grow into a secure retirement? The chained CPI is just like that, but in reverse. For a person receiving the average 2012 Social Security Disability Insurance benefit of about $1,100 per month, adopting the chained CPI would mean a benefit cut of about $347 per year (2.6 percent) after 10 years, $720 (5.4 percent) after 20 years, and $1,084 per year (8.13 percent) after 30 years.

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