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How would a chained CPI affect Social Security disability COLAs?

In an effort to cut a deal on the deficit, the Obama Administration has been considering changing the way cost of living adjustments, or COLAs, are calculated for recipients of Social Security disability and retirement benefits. The idea behind this is that the current way of calculating the COLA doesn't lead to a truly accurate estimate of how much more Social Security recipients are having to spend on basic needs, which is its purpose.

In the past few years, most criticism of the COLA decision-making process has traditionally been that it inaccurately represents the experience of recipients about how inflation is affecting them. This is because the basis for Social Security COLAs, the CPI-W, excludes the volatile food and energy prices from its estimate. In the case of the Great Recession, observers said, this resulted in small cost of living increases -- and no COLA at all in 2011. In reality, critics said, actual household costs were skyrocketing for people for whom food and fuel make up the majority of their budgets, such as SSDI and SSI beneficiaries.

With that in mind, it is somewhat surprising that, while agreeing that the current process is inaccurate, the latest COLA critics claim that it results in COLAs that are actually too high.

The analysis of whether to provide a COLA increase is performed annually by the Social Security Administration based on the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The Obama Administration has proposed changing that analysis to use the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U, which takes into account a subtlety of household budgeting -- the substitution of now-unaffordable products with cheaper options when money is tight.

So what would that actually mean for Social Security disability beneficiaries? Economists say that it would only reduce COLAs by an average of 0.03 percent a year, so where's the harm?

According to the co-director of the Center for Economic and Policy Research in Washington, it adds up over time. "[I]t's three-tenths of a percent a year that accumulates over time. Ten years, we're looking at a cut of 3 percent of your benefits; 20 years, 6 percent; 30 years, 9 percent," he says.

A lawyer with Community Legal Services of Philadelphia put it in real-world terms.

"The best example of why the chained CPI makes sense to a lot of economists I've heard is, well, if the price of a Mercedes goes up, people will just buy an Audi. That doesn't work for my clients," she said.

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