Chained CPI: Deficit reducer or accounting gimmick?

Major media outlets are abuzz with the idea that Congressional Republicans and the Obama administration are nearing a deal on the U.S. fiscal cliff. Details are slowly being leaked to the press, including tax hikes for those who make more than $400,000 per year and a framework agreement for entitlement reform sometime in 2013. Most notably, however, is a demand from Democrats for the usage of a "chained consumer price index" to determine future government benefits. While some administration insiders, including those who spoke to the Washington Post, were quick to say that this would achieve actual budget savings, the details about this addition are murky and somewhat questionable.

A chained CPI, in the simplest terms, is a more restrictive measure for determining the cost of living compared to regular methods. Currently, federal officials track these changes by looking at price fluctuations for certain food and utility staples. Unfortunately, according to the source, there are numerous coverage gaps in the analysis that critics argue allow for too much "growth" in traditional CPIs, which in turn may create overly generous government payouts.

With a chained CPI, annual benefits wouldn't accumulate so much. As part of a budget plan, this methodology would create "savings" by virtue of the government accumulating less debt than previously expected.

However, this begs the question – is this an accounting gimmick or an actual deficit reduction strategy? According to The Washington Post, the answer is a cautious yes. The source gives an example of an average government payout of $18,000 per year. Price inflation during 2012 would originally add roughly $500 in monthly benefits. Yet with a chained CPI framework in place, this figure would be about $350 because only certain factors would be calculated in the reduced system.

It remains unclear if a chained CPI system will be included in any final fiscal cliff deal. Those who rely on government benefits during retirement, including Social Security, should consider thinking about alternative ways to finance their life if these changes are implemented. To learn more about these and other major economic issues facing American citizens, especially those in the Baby Boomer generation, visit today.