FACTBOX-Understanding the 'chained CPI' for Social Security

Tue Dec 18, 2012 4:38am GMT

Dec 17 (Reuters) - U.S. President Barack Obama's latest offer for a "fiscal cliff" resolution includes a change in the way annual payment increases for Social Security are calculated for inflation.

The following is a description of the "chained" consumer price index switch and how the president's proposal could affect the roughly 56 million Social Security beneficiaries.

* Social Security benefits are recalculated annually for cost-of-living adjustments based on changes in the consumer price index as measured by the Bureau of Labor Statistics.

* Some economists have argued CPI fails to accurately measure inflation because it does not account for changes in consumer buying habits. For example, if pork prices rise more than beef prices, consumers might buy more beef. In 2002 the BLS introduced a "chained" CPI measurement designed to reflect such adjustments, as a complement to its traditional inflation gauge.

* Some lawmakers, including senators involved in the bipartisan "Gang of Six" negotiations, have proposed that the Social Security cost-of-living adjustment should be measured by chained CPI.

* But opponents including the AFL-CIO union say the chained CPI calculation is a way to gradually reduce Social Security benefits.

* The Center for Economic and Policy Research, a think tank, has said the chained CPI calculation would lead to a cut in benefits for an average worker retiring at age 65 of $650 a year by age 75, and $1,130 a year at age 85.

* The Congressional Budget Office in March 2011 estimated a chained CPI calculation would save the federal government $112 billion from 2012 through 2021.

* The president's 2010 Simpson-Bowles deficit reduction committee called for a switch to chained CPI calculations for Social Security benefits. (Reporting By Patrick Temple-West. Additional reporting by David Lawder; Edited by Fred Barbash and Xavier Briand)

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