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The Likely Way Social Security Benefits Will Be Cut

Washington is probably going to tweak the way Social Security calculates cost of living adjustments and you’ll feel it in your wallet during retirement

By Bob Rosenblatt | December 14, 2012
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Bob Rosenblatt is a writer and editor specializing in aging issues. His blog, Helpwithaging.com, focuses on the finances of aging.

An arcane change to the way Social Security’s annual Cost of Living Adjustments, or COLAs, are calculated may be part of a deficit reduction deal between President Barack Obama and Congress. The revision, known as the “chained CPI,” could cut the size of Social Security recipients’ benefits starting in 2014.
 
You could feel a financial pinch if COLAs get tweaked this way, especially if you’re fortunate enough to live for decades in retirement.
 
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The Chained CPI and the Deficit

Deficit cutters like the idea of switching to the chained CPI because it would save the government an estimated $200 billion or so over 10 years.
 
In addition to reducing the growth in Social Security, the new math also would slow spending increases for many other federal outlays linked to inflation, like veterans benefits and government salaries, and bring in additional tax revenue because tax brackets are adjusted for inflation annually.
 
How Social Security Measures the Cost of Living

Here’s a plain-English explanation of how Social Security’s COLAs might change and what that would mean for you:

Social Security has provided annual cost-of-living increases tied to the inflation rate since 1975. Next year, beneficiaries will get a 1.7 percent increase in their benefits.
 
Currently, Social Security makes its inflation adjustments using the Consumer Price Index for urban wage and clerical workers, or CPI-W, which measures changes in the cost of a market basket of goods and services.
 
The chained CPI, by contrast, assumes that people alter what they put in their shopping baskets due to price changes. For example, when beef becomes more expensive, Americans tend to eat less beef and buy more chicken, which is cheaper.

This calculation is designed to be "a closer approximation to a cost-of-living index than other CPI measures,” according to the U.S. Bureau of Labor Statistics, which does not endorse one inflation measure over another because “different users have different needs.”

Translation: Social Security's cost-of-living adjustments with the Chained CPI would reflect a lower inflation rate than the current CPI-W calculations.

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How Much Benefits Could Shrink

The chained CPI would reduce the annual increase in Social Security checks by about 0.2 percent a year, compared with the current measurement, according to the Social Security Administration. 

The National Women’s Law Center, which opposes moving to the chained CPI because it will reduce future benefits, based on forecasts by Social Security economists. For example, a 65-year-old woman retiring after a lifetime of average earnings could see an 8 percent benefit cut by age 90, compared to what she would receive with the current inflation measure.
 
Why Women Could Be Most Affected

Switching to the chained CPI would be “especially painful for women,” says a National Women’s Law Center report, because they have longer life expectancies than men, rely more on income from Social Security and are “already more economically vulnerable.” Women receive Social Security benefits three years and eight months longer than men, on average, according to the Social Security Administration.
 
Single black women would be especially affected, the group says, because they receive the smallest Social Security benefits, an average of $890 a month at 65. With the chained CPI, they might see their checks reduced by $45 a month at 80 and $70 a month by 90.
 
Because the focus on the national debt is so intense in Washington, and adjusting Social Security calculations is too wonky for many Americans to notice, you can probably figure that Congress and the president will adopt the chained CPI as part of a big budget deal.