How Bad is the "Chained CPI"?

By on December 19, 2012 in Current Events, Retirement with 123 Comments

Switching to a lower CPI at first would mean a few hundred dollars less per year for federal retirees. But its effect would compound over the years and decades until eventually, some retirees would likely earn tens of thousands of dollars less than they would under the current method of setting COLAs.Federal Times, December 18, 2012

The chained CPI (Consumer Price Index), a much-discussed method for saving money for the Government, is a slight, downward revision (0.25 – 0.30%) in the way the annual COLA (Cost of Living Allowance) for various groups receiving Federal payments is calculated.  The rationale for smaller increases is that people faced with rising expenses make their own adjustments in spending, as a coping mechanism.  So, COLA adjustments do not need to exactly match the rise in prices.  This argument does not seem especially compelling, does it?

A stronger argument for the change is that the slight cut, spread across millions and millions of recipients, will save many billions of dollars.  The money thus saved will help us out of the financial mess we are in.

Would the individual impact really be “tens of thousands” over time?  To get this into perspective, let’s see how it works for an actual recipient, a Federal retiree.  For our example, let’s take a newly retired Federal employee, age 62.  He was in the FERS retirement system and he retired after 30 years, with a high-three salary of, say, $57,272.  His annuity is 33% of $57,272, or $18,900 annually.  Here is his first 20 years of annuity increases, with and without an assumed COLA decrease of 0.3%.:

Year 3.0% Increase 2.7% Increase Loss Cumulative Loss
1 $19,467 $19,410 $57 $57
2 $20,051 $19,934 $117 $174
3 $20,652 $20,472 $180 $354
4 $21,271 $21,025 $246 $600
5 $21,909 $21,593 $316 $916
6 $22,566 $22,176 $390 $1,306
7 $23,243 $22,775 $468 $1,774
8 $23,940 $23,390 $550 $2,324
9 $24,658 $24,021 $637 $2,961
10 $25,398 $24,670 $725 $3,686
11 $26,160 $25,336 $824 $4,510
12 $26,945 $26,020 $925 $5,435
13 $27,753 $26,723 $1,030 $6,465
14 $28,586 $27,445 $1,141 $7,606
15 $29,444 $28,186 $1,258 $8,864
16 $30,327 $28,947 $1,380 $10,244
17 $31,237 $29,729 $1,598 $11,842
18 $32,174 $30,532 $1,642 $13,484
19 $33,139 $31,356 $1,783 $15,267
20 $34,133 $32,203 $1,930 $17,197

Over a 20-year time span, then, the above hypothetical employee granted annual COLAs 0.3% lower than the full CPI, would see his annuity eroded 5.6%.  His cumulative loss over 20 years would be $17,197.  Considering the billions to be gained, is this acceptable?

  • Disabled beneficiaries would, under current proposals, be exempted.
  • During times of higher inflation, the 0.3% would be proportionately smaller.  Example: if the “full” CPI is, say, 7%, then the adjusted, chained CPI would be 6.7%.  Psychologically, this appears to be more tolerable than 1.4% compared to 1.1%.
  • Above example uses 0.3% in all cases.  The actual change may be only 0.25%, with a loss smaller than projected.
  • If this change is implemented, it may make further, more painful losses less likely.

Author’s website:  here

© 2016 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

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Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University.

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  1. eugene kean says:

    Here we go again. The Federal Retiree and the Social Security takes it in the shorts if CPI goes into effect. So what does senior’s do? Not buy a medicine they need, or not buy food and be down to one meal a day? Congress or Senate won’t feel the effect because of their retirement when they leave office or stay in because you can be sure they will vote themselves a raise to make up for the cost of living that year.

  2. Lightnfit4u says:

    During times of higher inflation, the 0.3% would be proportionately smaller.  Example: if the “full” CPI is, say, 7%, then the adjusted, chained CPI would be 6.7%.  Psychologically, this appears to be more tolerable than 1.4% compared to 1.1%.

    This is the BIG LIE!!! During times of higher inflation the relative substitution effect would be greater.  Under an inflation rate of 6.7% the substitution rate would double from .3 to .6. 

    If the formula TRUELLY was always .3 % lower why not eliminate the chained CPI (save millions in processing costs) and just adjust the regular current CPI to the CPI – .3 ??????????????????????????????????????????????????????????

  3. Barrytex says:

    I don’t see why seniors who paid into SS for all or most of their working life should have to receive lower cost of living increases.  It is congress that caused the problem with SS by “borrowing” the excess funds and spending them, leaving us with a bunch of IOU’s.

  4. DeathWatch says:

    Most of us already choose substitutes.  Why not take the direct route and simply limit the the life of the working poor?  Why not rent the White House, the occupants can have a substitute 2 bedroom in SE, use the schools, and public transport in the spirit of leading.   

  5. enigma1083 says:

    I find the explanation the spokesman use for explaining the chained CPI interesting. Citing the example when  the price of steak goes up you switch to chicken. 
    This poses a number of opportunities to manipulate the statistics, but leaving their simplistic explanation aside for the moment. 
    How far down the food supply do we go? When chicken costs more, do we base COLA on the cost of “Old Roy” or perhaps spoiled meat?
    There is a tremendous amount of obfuscation in precisely how this is calculated. I believe the formula is deliberately complicated to quell the uproar from the masses if they were truly informed.

  6. Itsjustmeagain1 says:

    Much of the deficite increase is from DEBT INTEREST payment.  Parse it out and then blame whoever:  revenue reduction from Bush Tax Cuts and massive spending, 2 wars on a credit card and weapons programs that are losers or the attempt to stop the slide left to this Administration.
    I don’t agree with the Chain CPI, ultimately it will drive everyone into poverty.  The rational  “if they can’t eat steak, they will eat chicken and that is less costly” then where will it end….  If they can’t buy horsemeat, they can eat Alpo? Ultimately, it’s a bone for the Republicans to get something done. We’ll change it when the Republicans lose the House next year.

  7. KR says:

    yes – this is a decrease in income, but I had rather get the decreased amount than not receive anything at all which seems to be the risk implied.

  8. Retired Fed says:

    Don’t forget that you don’t pay taxes on the money you lose.  So that softens the blow a bit.

    • magdalena48 says:

      My tax rate is so low as my income is ALREADY so low.   Subsequently, the tax rate softening is minuscule.   Not looking forward to even a LOWER  income.

  9. Retired Fed says:

    Don’t forget that you do not pay taxes on the money you lose.  So it is not quite that bad.  However, I’d rather have the money.

  10. Retired Fed says:

    Don’t forget that we won’t have to pay taxes on the money we lose.  So it is not quite as bad.  However, I’d rather have the money.

  11. libtor says:

    Making the case for a limited CPI by saying retirees learn to “cope” with less is just another easy rationale by rich folks who don’t have to “cope” and their lives don’t change much. Retirees, especially the old CSRS really didn’t have much of the advantage that later FERS retirees have of building up a TSP.  Lowering the CPI for those under the old system slowly strangles them and should not be a part of the proposal. FERS retirees are not initially tied to any COLA and have had an opportunity to build  TSP or private portfolio that according to our country’s finest financial advisors is so wonderful. Just start the new formula with the new retirees.  

    • Bill Williams says:

      The politicians will again screw retirees, especially the CSRS retirees.  I call recall when the politicians decided that CSRS retirees Social Security would be reduced by two thirds, politely called and “offset”.   Yes, liberal  politicians spend with wreckless abandon, then take it out of earned pensions and increased taxes.   Somehow they expect retirees to live on dog food, but wait, dog food is pretty expensive.    Now with ObamaCare, special committees decide who will get the health care, so the annuity won’t matter much in the long run.  

    • First FERS Employee says:

      I normally don’t post. I would like to respectfully question the statements that “Retirees, especially the old CSRS really didn’t have much of the advantage that later FERS retirees have of building up a TSP” and, “FERS retirees….have had an opportunity to build TSP or private portfolio that according to our country’s finest financial advisors is so wonderful.”
      As a FERS employee, I would like to mention that FERS employees pay a lot more for their retirement system than did CSRS. FERS employees pay the full percentqage into social security, about the same percentage that CSRS paid into their pension, but the FERS annuity portion of a FERS retirement is a much smaller percentage of the retiree’s salary as compared to CSRS.
      The only way that FERS can match the old CSRS benefit was to pay additional monry into the TSP. Though the government does match a portion of FERS employee contributions, overall the FERS employee has to pay much more than CSRS for the same benefit plus take the risk that TSP investments will provide a sufficient return. Also, the FERS employee does not have access to “our country’s finest financial advisors”. The TSP does not provide any financial or investment advice. The FERS employee either takes that risk alone, or has to pay a private firm for investment advice.
      I would also suggest that the goverment adopted the FERS system as a way of reducing their costs for CSRS. Does anyone think the FERS system was a better deal than CSRS? Most CSRS employees I work with agree that CSRS is the better system for employees. That’s why most CSRS employees never switched to FERS even though they were given the opportunity to do so.

  12. Bill Williams says:

    Look, the socialst are gonna get the money from retirees, or wherever else, and spend it no matter what.   Liberal politicians get their big piece of the pie, so why should they be concerned about anyone else?    They just keep squeezing until retirees are eating peanut butter and crackers.  

  13. Lightnfit4u says:

    “During times of higher inflation, the 0.3% would be proportionately smaller. Example: if the “full” CPI is, say, 7%, then the adjusted, chained CPI would be 6.7%. Psychologically, this appears to be more tolerable than 1.4% compared to 1.1%.”  This statement is incorrect!!  It isn’t true!!!  The higher the rate of inflation the more people will substitute to cheaper goods!!!

    The Chained CPI is not equivalent to the  CPI – .3% 

  14. Lightnfit4u says:

    Lets get one thing straight.  The Chained CPI is not equivalent to the current CPI – .3%.  The .3% varies depending on the rate of inflation – it gets larger when the rate of inflation increases because more people will substitute to cheaper goods – if they are available …

  15. Lightnfit4u says:

    The author doesn’t understand the chained CPI and how it works — the higher the inflation rate the more people will substitute to cheaper goods they can afford.  Also the chained CPI has one huge flaw that wiill completely destroy SS and that is it - DOESN’T take into account those at the lower income level no longer being able to substitute to something cheaper because their is nothing cheaper available.  The CPI as it currently is – understates inflation. 

    • Lightnfit4u says:

      Lets get one thing straight the Chained CPI is NOT the current CPI – .3% – if it was why not just have a CPI – .3% ???  The reason why is that the .3% can increase and decrease depending on the underlying rate of inflation.

  16. Ex Forester says:

    Staying out of devise political perspectives. (I have em, but will keep em to myself)  The above example is skewed as it does not include the FERS social security portion which would be affected by the same percentage.
      I am recently retired under CSRS with a similar high three.  My pension plus my wife’s SS (small as she only worked part time) amounts to $43,851 in 2013.   I made a similar chart and the 20 year cumulative loss is  $35,015!   No small number….  However it is important to consider that there is no reason to believe the government will be able to even pay pensions and social security in 20 years if it continues to spend what it doesn’t have.

  17. Adhere to the Const says:

    The Constitution requires no bill of attainder that would legislatively punish one group.  The hysterical call for taxing (punishing) the one percent is asinine. I make less than $50k, but I do not envy those poor souls who work their butts off for money.

  18. Dave retired says:

    A “Chained CPI” only only institutionalizes a loss in the standard of living.  We have seen it this year already.  The CPI-W on the Social Security web site shows that between SEPT 2011 and SEPT 2012 inflation was 4.5% but retirees only got 1.7%.  To explain  as Nightly Business Reports puts it if you can’t afford “oranges” you buy “Apples”.i.e. chained down.  With the lower CPI increases you never will be able to buy  “Oranges” again and the “Orange” makers go out of business.  My question when do we chain down tuna from Starkist to 9-Lives????

  19. 4middleclass says:

    The author should have ran the numbers for a CSRS retiree (who’s annual annuity is larger because they paid more into it) the cumulative loss over twenty years would be well over $100K.   Federal employees have already contributed over $120 Billion toward reducing the deficit (reference article on NTEU website) due to no cost of living increases for 2-3 years and other concessions.   time to stand up for Federal employee rights , rather than playing the blame game…

  20. New fed Retiree says:

    Note that “disabled” retirees would be exempt…  Why?  They don’t pay taxes and make 75%.  Why are they exempt?  I say include them in any negotiation.  I have voted Republican, but I think that it is pure BS to make this all about the retirees that are all on fixed incomes anyway.  Why aren’t “earmarks” deleted, Why aren’t assistance payments to other countries deleted.  Why screw with seniors that have given their useful working careers and now draw SS or a fed annuity.  OWCP folks seem to be something special I guess, but most are treated pretty well.  I wish I didn’t have to pay fed taxes.

    • Lightnfit4u says:

      “Disabled retirees”  the author has it wrong – it’s “disabled and drawing SSI only” doesn’t have the lower COLA adjustmnet.  Disabled vets and disabled military retirees would get the lower chained CPI adjustments. 

  21. msgrowan says:

    It’s disenheartening to read many of the prior comments, which seem to be in a “race to the bottom” to see who can be the most scurrillous in their ad hominem partisan attacks.  The author was merely presenting an objective analysis of what effect a “chained” CPI calculation factor would have on COLA adjustments.  No one is thrilled with the idea of a less generous CPI calculation factor, but the reality is that in order to restore the nation to some semblance of fiscal stability, we need to recognize that our current fiscal house of horrors was created by both major political parties over many years, and that painful changes of this type – together with major spending cuts – are essential if we’re to pull out of the asymptotic downward fiscal curve we’re in.  Consider what kind of a debt-ridden, dispiriting  future we’ll be leaving for our kids and grandkids if we don’t.  So let’s shelve the name calling, finger pointing, and mudslinging.  While emotionally cathartic, they’re also nonproductive and destructive of the attempts to craft workable solutions to our self-imposed fiscal dilemma.  I say self-imposed because we as a nation  have been complicit in electing and re-electing pols who pander to the public by offering cornucopias of Federal benefits, without bothering to be concerned how said cornucopias will be paid for.  That would be terribly boring and oh so 19th century.  So it’s not just the pols who are to blame; it’s everyone who acted as enablers by eagerly scarfing up said benefits and rewarding the pols in question with our votes subequently and ensuring their re-election.  The corrupt quid pro quo involved here is quite clear, and helps explain the dilemma (or pickle if you prefer) in which we find ourselves.

    • Japygid says:

      In the article, I tried to be objective, stating the facts plainly.  Now let me depart from neutrality.

      I strongly believe the smaller increase to COLAs will, in the aggregate, do so much good… I support the chained CPI proposal.

      Note I am retired CSRS and I will “suffer” financially if they do this, but my pain will be trivial indeed compared to the healthy effect on the recovery we all want to see.

      God bless the United States.

      • Smcneil2 says:

        Your argument is fine.  But why do I get the feeling that we are being taken as stool pigeons.  Our “sacrifices” does not contribute to deficit reductions, but only mititgate it making it easier for the politicians to spend it while the wealthy get their big tax cuts.  And I don’t see big corporations making any sacrifices while their CEOs get big bonuses.  And the lobbyists are only interested in what Uncle Sam can do for them.  It tends to belie the statement that we “must” give up our earned benefits when no one does.

      • Opinionated_Lady says:

        Sorry, I strongly disagree.  If the money were to be used for stimulus to the economy then it would do some good as it would create jobs which would increase consumer demand benefitting the entire economy.   It won’t be used for stimulus.  It will be used to fatten the coffers of the defense industry, which keeps us in a perpetual state of war, for tax breaks to corporations that promptly offshore jobs and park money overseas, and to support the tax system that has distributed the wealth of the nation upward for the past 30 years. 

        It is unfair and just plain wrong to change the rules for folks who worked for years knowing that a defined benefit would materialize at the end of their careers, and now depend on their retirement.  Further, it takes money out of the economy that would otherwise be spent by the retirees.  How then can this sacrifice possibly be good for the country?  It can’t be.  It is theft, pure and simple. 

        Note that FERS employees will get a double whammy because the same formula is proposed for Social Security. 

      • msgrowan says:

        Being also a CSRS retiree who believes that we must accept such sacrifices – and more – in the national interest, I concur in your opinion.  Let’s hope that God acts as you wish; our political “leaders” in both parties can’t be counted on to do so.

    • Blue Collar Retirement Planner says:

      I hope you don’t mind if I restate what you said with a simpler vocabulary because I don’t think everyone is understanding.

      We have lived high on the hog while others have sacrificed to keep us so well

      And the standard we are using now isn’t based in a market place reality – our skill sets don’t merit the money’s we’ve made…

      And it’s not sustainable to the one’s we are supposed to be serving…

      Cut’s HAVE to happen to make things fair for everyone – and in reality, deep down, we all want to be the good guy doing the right thing….

      And, again, because your spending is going to decrease (if you maximize Medicare and the Advantage plans) you really are NOT going to feel it.

      • OldRet says:

        During the dot com boom I could have make tens of thousands of dollars more (and maybe even double my pay) not to mention stock options and everything else as a computer programmer. I chose to accept much less money and stick with the government because I was vested in it for so many years, for job security, service to my country (I’m also a Viet Nam ERA vet) and stability in retirement. While the dot comer’s were living high on the hog and making millions I was toiling away at my government job slowly accumulating money so that I could retire an live comfortably. Now that the Feds are making reasonble salaries comparable to the private sector, at least compared to what we made years ago, eveyone wants to target them as rich leeches. Sorry, but I earned my retirement and all the benefits that go with it. Cut the people who did NOTHING for this country and are living on UNEARNED entitlements year after year after year.

        • guest again says:

          OldRet….YEP you got it right!!!!

          • Blue Collar Retirement Planner says:

            Personally, when I was working my butt off with a degree for less than $38,000 a year and found out my little 18 year old high school graduate mail carrier was making over $50,000 I was offended.  That’s not in line with the private sector marketplace for skill set/responsibility to wage ratio and is downright unfair.  I had responsibility for 2 employees, managed an office, made money for my company giving exceptional high skilled service and all she was capable of was delivering a letter – and that’s not assumed – I talked to her one day…

            Maybe I’m wrong, everybody doesn’t want to be a good guy…

    • Lightnfit4u says:

      This is pure propaganda that will destroy this country in order to make the middle class bend over into more slavery.  The Federal Reserve can print the money off and pay all debt instantly .  The rich should have their taxes increased to twice the Bush tax cuts 8% vrs 4% increase until  the budget gets balanced.

      • msgrowan says:

        You are badly in need of an Economics 101 class if you really think that the Fed can without cosmically negative consequences inflate the currency supply by $16 trillion plus in order to “pay all debt instantly.”  Similarly, the type of “soak the rich” taxation scheme you suggest would not even come close to dealing with our current annual $1 trillion plus deficit, let alone paying off over time the entire national debt.   The key issue is the nonsustainable high and growing Federal spending rate in which we are ever more deeply enmired.  Federal spending under President Obama has risen to 22.7 percent of our GDP, vs. the 18-19 percent rate under his two predecessors, while he has added over $7 trillion to the current national debt in less than four years, an almost 80 percent increase over the $9 trillion national debt in place when he took office.  The nonpartisan Congressional Budget Office several months ago reported that the tab for implementing Obamacare will add $1.68 trillion alone to the national debt over the next decade.  Finally, the Obama administration’s own budget projections envision reaching a national debt of $26 trillion by 2025, and this is based on rosy assumptions of a unrealistically high estimate of economic growth.  All this isn’t propaganda; rather these are cold hard facts detailing our taispin into fiscal oblivion.

  22. Ericpeacock100 says:

    Would this affect the yearly cost of living raises for current fed employees, if we ever get another one that is?

  23. Salankford says:

    Geez,  what would congress and the president do if there were no federal employees to take away from.

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