In order to stem the growing deficit and potentially create a more accurate cost-of-living adjustment (COLA) calculation, many congressional representatives have promoted use of the so-called “chained” consumer price index (CPI).
Unlike the current CPI, the chained CPI accounts not only for price increases, but also for the substitutions consumers make based on those increases.
“For example, if beef prices are increasing, the chained CPI assumes that to some extent, consumers will switch to chicken and use comparable goods to stave off increases,” said James Osborne, president of Bason Asset Management. “The end result is that there would be a smaller COLA due to a lower calculated rate of inflation.”
Of course, a consistently lower COLA would lead to lower annual increases in Social Security benefits, and the AARP is lobbying to prevent the change. In a letter to the Ways and Means Committee, the organization stated that “Despite claims to the contrary, the chained CPI is not a more accurate measure of inflation, especially for Social Security COLAs. In fact, it is even less accurate than the current formula.”
Even the current COLA calculation, which is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, doesn’t accurately reflect the needs and spending habits of retirees, the long-term disabled and other Social Security recipients, according to AARP. While the prices of food and other common consumer goods are roughly in line with inflation, health care and long-term care costs have risen far faster, and seem to be rising still.