What is the Chained CPI and How Would It Impact Your Retirement?

By on October 26, 2015 in Retirement with 100 Comments

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“‘America First’ restores 75% of sequester cuts, makes meaningful reforms to mandatory spending, reduces long-term debt, (and) protects Social Security for future generations of Americans.” That is a quick summary of new legislation proposed by Congressman Scott Rigell (R-VA) and as described by the Congressman in a press release.

With the national debt now in excess of $18 trillion and a continuing increase of hundreds of billions of additional debt being added every year, we can anticipate there will be an impact on individual Americans when the government decides to contain and possibly reduce the spiraling deficit. The chained CPI is one possible approach to cutting federal spending that is being considered. A similar proposal has been made in the past but it was not implemented.

The way that the new legislative proposal would change the current direction of the federal budget would be, in part,  to raise more money from other sources. This is where the chained CPI would come into play.

What is the “Chained CPI”?

While the consumer price index (CPI) deals with the rise and fall of expenses for fixed items, a “chained CPI” would also consider choices people may make as a result of behavioral changes. For example, if the price of beef goes up, many people will buy chicken instead because it may be a substitute that costs less. Also, when the price of a product goes up, people will probably buy less of that product.

The chain weighted CPI would incorporate changes in both the quantities and prices of products. The result is that when calculating costs for multi-billion dollar programs like Social Security and the federal retirement system, a chained CPI would result in smaller benefit increases over time and require less federal spending as a result.

A switch to the chained CPI is often considered a more accurate measure of inflation although, as noted below, that system will not as accurately reflect increased costs for older Americans. As noted by the executive summary of the legislative proposal, “Since the chained CPI grows more slowly than the traditional CPIs, benefits and eligibility thresholds would grow more slowly, resulting in lower spending.”

Savings to the Government—and Less Money for Those Receiving Benefits

The savings to the federal government would be significant. The executive summary of the bill estimates savings of $150 billion over 10 years.

If you are a current federal employee or a retired federal employee, you would be impacted by a chained CPI when it comes time to receive your future retirement payments. Each year, federal retirees benefit from a cost of living allowance. In most years, this results in an increase in the amount of money received by a retiree. Of course, sometimes there is no COLA adjustment under the current system and we know there will not be a COLA in 2016.

Impact on Federal Retirees

The actual difference in a chained CPI on individual federal retirees would not be a huge hit on a yearly basis. But, as author Robert Benson illustrated in a couple of examples, there would be a cumulative impact over time that would add up to a significant amount of money.

Other proposals have been made previously to change the method of calculating the annual COLA in order to increase the annual payments. One of these proposals is the CPI-E which would put more weight on increases in areas that have a greater impact on older people. (See Could There Be a Higher Annuity in Your Future?) Those who may have been hoping for a future with a more generous COLA package will likely be disappointed by the possibility of the chained CPI becoming the more relevant measure of future increases.

Under the CPI-E, annual increases in medical expenses would be given more weight. As older people often have more medical expenses, their actual expenses may increase more than expenses for younger people who are often healthier.  The chained CPI, however, would not take this age differential into account in same way that the CPI-E would do.

Negotiations on the next federal budget will undoubtedly result in numerous proposals potentially impacting the federal workforce. It is unlikely this most recent legislation will be adopted in the near future as it is currently proposed, especially in a year when campaigning for the next presidential election is already underway. But, as changes are made and new proposals emerge that would impact the federal community, we will advise our readers.

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.


About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources.