The overall Consumer Price Index climbed 1.7 percent in 2012, below the 2 percent target set by the Federal Reserve. Excluding food and fuel, the so-called core index, inflation was 1.9 percent, the Labor Department said. Labor said Friday both overall and core prices for February were up 2 percent from last year.
An experimental index set up by the Bureau of Labor Statistics indicates a much higher rate of inflation on things for which seniors spend their money.
The problem with chained CPI as applied to Social Security increases is that it is tied to the spending habits of workers, not retirees who are apt to spend a larger portion of their income for housing and healthcare, the two cost areas that have been going up the most quickly. Healthcare inflation last year rose 3.7 percent and housing inflation was pegged at 2.1 percent.
"The Bureau of Labor Statistics' experimental elderly index more accurately tracks the consumption patterns of the elderly, and it shows that inflation for seniors is actually higher, not lower, than the current measure," said Nicole Woo, director of domestic policy for the non-partisan Center for Economic and Policy Research. "If accuracy is indeed a concern, the BLS could construct a full elderly index for annual Social Security cost-of-living adjustments."
The Heritage Foundation estimates the CPI overstates inflation by a full percentage point. But AARP estimates, based on seniors' spending habits, the CPI already underreports inflation 0.2 percentage points a year. Chained CPI would add 0.3 percentage points a year to that, picking seniors' pockets by about $112 billion annually and compounding over time.
"Using a more accurate inflation index would save Social Security about $112 billion over the next 10 years," David C. John said in a Heritage Foundation blog post. "That is not nearly enough to fix Social Security's massive deficits, but it is a good start. Doing nothing will result in 22 percent to 25 percent across-the-board benefits cuts for everyone who is receiving benefits."
"The adoption of the chained CPI is likely to further erode seniors' standard of living," AARP says on its website. "A chained CPI makes sense only in a budget-driven world where accuracy takes a back seat to benefit cuts for the purposes of deficit reduction."
AARP further explains: "Look at it this way: The COLA [cost of living adjustment] for this year was 1.7 percent. If your monthly Social Security check was $1,250 last year, it increased to $1,271.25 this year.
"With the chained CPI, you would be getting $1,267.50 -- or $3.75 less a month and $45 less a year. Again, that might not seem like a big reduction, but if the COLA is the same next year, the difference increases to $7.61 a month and $91.32 for the year.
"You start to get the picture. The gap accelerates and begins looking like real money. If you're 62 and take early retirement this year, by age 92 -- when healthcare costs can skyrocket and more than 1 in 6 older Americans lives in poverty -- you'll be losing a full month of income every year."
Nonetheless, House Minority Leader Nancy Peolsi, D-Calif., said last week she'd be willing to look at chained CPI if it can be assured "it doesn't hurt the poor and the very elderly."
What doesn't get talked about as loudly is chained CPI will also have an effect on tax rates, easing people into higher brackets over time and raising more revenue without lawmakers having to utter the dreaded words: tax increase.
Chained CPI has its backers: The Washington Post editorial board, the Committee for a Responsible Federal Budget, the Center for Budget and Policy Priorities and the Heritage Foundation among them, along with various bipartisan congressional commissions like Simpson-Bowles, Domenici-Rivlin and the Gang of Six.
Chained CPI attempts to take into account consumer reaction to price shifts. While the regular CPI will reflect a consumer shift to cheaper apples if the price of a premium variety goes up too much, chained CPI will account for what is known as substitution bias, a consumer shift to oranges if the price of apples gets too steep.
The Iowa Alliance for Retired Americans says the substitution idea falls apart when it comes to healthcare costs.
"These costs cannot simply be substituted with a cheaper version. A senior cannot just substitute triple bypass surgery with a double because it's cheaper," the alliance notes. "The chained CPI ignores this reality and instead is a backdoor way of trying to balance the budget on the backs of our nation's seniors."
The Moment of Truth Project estimates switching to chained CPI for all inflation-indexed government programs and the tax code would reduce the deficit through 2022 by $236 billion. That's pretty close to the 2010 Congressional Budget Office 10-year estimate of a $221 billion.
The Center for Economic and Policy Research said in December switching to the chained CPI "would result in cuts to already modest Social Security benefits. As well, the chained CPI is likely not an accurate measure of the inflation rate seen by seniors. Finally, ... the chained CPI would result in a proportionately larger increase in income taxes for lower- and middle-income Americans than for those in the top tax brackets.
"The change to the chained CPI would also cut benefits for veterans, low-income children, people with disabilities and many others who rely on government programs."
The Committee for a Responsible Federal Budget said though on first blush it looks like chained CPI would have a disproportionate impact on those earning $10,000 to $20,000 a year, changes to the tax code could take care of that. The Tax Policy Center estimates people making more than $100,000 annually actually would bear 60 percent of the impact in higher taxes.