Power Grid Blog
Chained Consumer Price Index Will Reduce Supports for People With Disabilities
December 19, 2012 | David Heymsfeld, AAPD Policy Advisor
A concept that has been gaining considerable attention, in recent discussions of deficit reduction, has been conversion to a “ chained consumer price index” (CPI). Switching to a chained CPI would reduce the annual inflation adjustments used in safety net programs important to people with disabilities, such as Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI.) Although the details of the reduction are technical and the annual reductions would be small, in the long run this proposal would reduce benefits in safety net programs by 5% or more.
An essential element in safety net programs is that benefits are adjusted annually by a cost-of-living (COLA) adjustment, to take account of rising prices. Without this adjustment, benefits would suffer a loss of purchasing power of an estimated 2% each year over the coming decade. This may sound like a small amount, but it can make a vital difference to many people dependent on the limited benefits of safety net programs (for example, Social Security Disability Program benefits average about $13,000 a year).
Currently, annual COLAs are based on Consumer Price Indexes that measure changes in prices of a number of spending categories (food, housing, health care and others). The chained price proposal would switch from the CPI now used to, a different CPI; known as the chained CPI. The chained CPI produces a lower inflation measure than the current CPI, because the chained CPI assumes that when prices of a commodity or service go up; consumers will switch to a less expensive product. For example, when beef prices go up consumers will switch to a cheaper alternative such as chicken.
Use of the chained CPI results in annual inflation estimates about .3% (three tenths percent) less than the CPIs currently used. This may sound like small change, but the effect is cumulative and the total shortfall increases every year. It has been estimated that if a chained CPI began in 2012, in ten years the average annual SSDI benefit would be $350 less than it would have been under the CPI now used, in 20 years $720 less, and in 30 years $1,100 less That’s a lot for the average SSDI recipient, whose SSDI averages about $13,000 and is 75% or more of their total income. People with these low-income levels are already hard-pressed, and a few hundred dollars less may force cutbacks in vital needs such as food, shelter, or health care.
A chained CPI is likely to be more harmful to persons with disabilities than many other Americans. Persons with disabilities tend to have lower incomes, so they are already buying less expensive products and services and cannot make the “beef to chicken” substitution; which is the justification for a chained CPI. In addition, even the CPIs now used may understate inflation’s effects on people with disabilities. For example, many in our community now spend a higher proportion of their incomes for health care than other citizens. Health care has had larger cost increases than other goods and services used to measure CPI.
Moreover, many people with disabilities need safety net programs for longer than other Americans. Since the effects of a chained CPI compound over time, the longer a person receives benefits, the greater the reduction. In the SSDI example above, switching to a chained CPI would lead to benefits reduced by 2.6% after ten years, 5.4% after 20 years, and 8.13% after 30 years.
Many policymakers are aware of these inequities and if chained CPI proposals go forward, there may be adjustments to protect those who are most reliant on safety net programs.
Comments
Submitted by Anonymous at 12:42 AM on August 9, 2013