Dean Baker, a co-director of the Center for Economic and Policy Research in Washington, said the president's budget plan will likely feature a proposal to adopt a chained CPI for the calculation of Social Security cost of living adjustments.
The administration suggested this was a mere tweak to entitlements that will make Social Security benefit calculation more accurate in exchange for raising more revenue. However, the change amounts to a substantial cut to Social Security benefits, Baker said.
"Switching from the current index to the chained CPI would immediately begin to cut benefits and would continue to do so year after year," Baker said. "An average worker retiring at age 65, would get a yearly cut of $650 by age 75, but at age 85, this would be a cut of $1,130 a year."
Baker said the chained CPI would have a much larger impact on the income of most retirees than President Obama's tax increases last year did on the wealthy.
For a couple earning $500,000 a year, their taxes went up by $2,300 a year. That is less than 0.5 percent of their pre-tax income and a 0.6 reduction of their after tax income.
Since Social Security is about 70 percent of the income of the typical U.S. retiree, switching from the current index to the chained CPI would be a reduction in income of more than 2 percent, more three times that of the tax increase to the wealthy, Baker said.
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