Why Chained CPI Matters to You

I’ve previously spoke about the value of saving today. Why? Because Social Security will be practically non-existent by the time Gen Y’ers reach retirement age. However, it looks the Baby Boomers may soon experience – at least partly – the diminishing promise of Social Security benefit payments.

What the heck am I talking about? Chained CPI. In the current budget talks, our government is considering modifying the annual increase (cost of living adjustments) in Social Security benefit payments. Right now, Social Security payments are adjusted for inflation. This ensures that Social Security benefit recipient's purchasing power is maintained over time. For example, while a retiree benefit may currently receive $1000 month in benefits this year, that same retire will receive $1030 a month next year. The increase compensates for the effect of inflation on the dollar.

"...Social Security benefit payments will fail to keep up with inflation."

The rate at which Social Security benefit payments increase every month is a reflection of the Consumer Price Index (CPI) – a metric that calculates the average cost of a particular basket of goods. As prices rise, the chained CPI - unlike the conventional CPI - substitutes particular goods for less expensive alternatives, The specific mechanics behind the two indexes are less important than the consequences of a switch from the conventional CPI to the chained CPI: increases in Social Security payments will fail to keep up with inflation. Compound interest will magnify the consequence of this over time. Said another way, the dollar amount of Social Security benefit payments will be able to purchase less and less as years go by.

Now, the Social Security Administration has yet to officially switch over to the chained CPI. That will be determined by the coming budget talks. Feel free to contact your Congressperson if you feel strongly about the switch.

"...the importance to not count on government subsidies in retirement remains. It is on the individual, to save and invest wisely, so as to ensure adequate funds for retirement."

My point, however, is this: The government is already making its move to cut Social Security benefit payments. Hence, Social Security benefits will be a token gesture when Gen Y’s reach retirement - not to mention what current recipients of benefit payments may expect. Thus, the importance to not count on government subsidies in retirement remains. It is on the individual, to save and invest wisely, so as to ensure adequate funds for retirement.