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What the Heck is Chained CPI? Explaining The Latest Fiscal Cliff Jargon

Chained CPI has been touted as a possible solution to the fiscal cliff impasse


You've probably come across the term "chained CPI" in the barrage of media coverage on the imminent "fiscal cliff." It's being touted as the newest proposal that some Republicans and Democrats think might end the stalemate in fiscal cliff negotiations.

So what is chained CPI?

Chained CPI stands for chained consumer price index.

A range of indexes are measured by the Bureau of Labor Statistics, monitoring Americans' spending habits on everything from "bus fares to ladies’ dresses to broccoli," as Time magazine put it.

The proposal involving chained CPI would change the way we measure cost-of-living.

It involves attaching Social Security benefits to the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) rather than the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Senate Minority Leader Mitch McConnell brought up the idea, and House Speaker John Boehner included it in his deficit-reduction proposal, noted the Wall Street Journal.

On the other side of the aisle, former White House chief of staff William Daley said an agreement to use chained CPI could be a starting point in negotiations, according to Bloomberg.

Instead of the government matching benefits like Social Security to versions of the consumer price index that measured the change in prices for a hypothetical "basket of goods," the government would use chained CPI, which takes into account the fact that consumers buy less of the goods whose prices are rising, the Journal explained.

Or, as The Atlantic said, "The simple idea is that Washington measures inflation too generously. It assumes that people don't substitute similar goods when one thing gets too expensive."

The "chained" CPI would reportedly offer a more accurate picture of what American consumers are actually buying.

The chained CPI would also grow more slowly, by around 0.3 percent annually, compared to traditional CPIs, according to Time. Which in turn would mean that cost-of-living measures for entitlement programs like Social Security would also increase more slowly.

According to The Atlantic, using chained CPI would save between $200 billion and $300 billion over 10 years by gradually cutting Social Security benefits and raising taxes.

The Washington Post put some hypothetical numbers into the scenario: "Imagine, for example, a person born in 1935 who retired to full benefits at age 65 in 2000. According to the Social Security Administration, people in that position had an average initial monthly benefit of $1,435, or $17,220 a year. Under the cost-of-living-adjustment formula and 2012 inflation, that benefit be up to $1,986 a month in 2013, or $23,832 a year. But under chained CPI, the sum would be around $1,880 a month, or $22,560 a year." Critics argue that using chained CPI would disproportionately impact seniors, people with disabilities, and families in lower middle class tax brackets.