‘Chained CPI’ shaves tax breaks. Will your retirement pay be next?

  • By Wire Service
  • Monday, January 8, 2018 1:30am
  • Local News

by Tom Philpott

The new Republican-passed tax law deploys a new method of tracking inflation called the “chained” Consumer Price Index, a tool that will dampen future adjustments to federal tax brackets and standard deductions, reducing over time the value of touted tax breaks for individuals and companies.

This first-ever use of Chained CPI is viewed by guardians of Social Security, federal retirement plans, veterans’ compensation and survivor benefits as a worrisome development. If the same method for measuring inflation is adopted widely, they contend, it would cut the lifetime value of most federal benefit plans.

“It’s a bad omen, in that it could have repercussions on entitlements, especially at a time when people like (House Speaker) Paul Ryan are announcing they’re going to go after earned benefits,” said Monique Morrissey, an economist with the Economic Policy Institute. EPI is a nonprofit think tank that assesses how laws and policies impact the welfare of low- and middle-income workers.

By making Chained CPI part of the tax code, architects of the massive tax overhaul created a “significant revenue raiser to help offset some of the other costs in the bill,” said David Certner, legislative counsel for AARP.

The retiree advocacy group criticizes the new tax law for cutting tax rates deeply for businesses while giving only temporary tax relief to most households, raising health care costs for millions of older Americans and increasing the federal debt by $1.5 trillion over the next 10 years. AARP contends this puts at greater risks other critical programs for the elderly including Social Security.

Certner said use of the Chained CPI in the tax code will dampen inflation-based adjustments to income tax brackets, standard deductions and contributions employees can make to 401k plans.

That “means more and more money over time will be taxed at higher rates,” chipping away at the value of the tax breaks Republicans now tout.

Federal entitlements have been adjusted for inflation for decades using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The index tracks price changes for a market basket of goods and services bought by working-age Americans. For example, changes in CPI-W during the third quarter of 2017 versus the third quarter of 2016 justified the two percent cost-of-living adjustment this month for Social Security and federal retired pay.

A separate but similar CPI for All Urban Consumers (CPI-U) has been used for other purposes including to adjust federal income tax brackets until Republicans replaced it last month with the Chained CPI.

Critics of traditional indices argue they overstate inflation by failing to take into account how consumers react month to month to changing prices. For example, if beef prices rise, shoppers might purchase more chicken that month. Yet CPI-W and CPI-U market baskets assume no change in the weighting of chicken-to-beef purchases through the year.

Every several years the Bureau of Labor Statistics, which tracks consumer prices and maintains these indices, will conduct broader consumer surveys to adjust the weighting of various goods and services tracked by CPI-W and CPI-U. But that’s not frequent enough to eliminate what critics have labeled “substitution bias.”

“We essentially assume that consumers just keep buying the same quantities of goods and services regardless of what happens to prices,” said Steve Reed, an economist at the Bureau Labor Statistics (BLS).

Starting in 2002, BLS created the Chained CPI (C-CPI-U) to better approximate inflation experienced by consumers month to month. The index tracks not only prices but changes in shopping patterns as a result of price changes.

“With Chained CPI, we are using expenditure survey data from essentially every month,” Reed said. “We are using [product] weights that are much more recent [and] based on what consumers are actually purchasing right now.”

Various deficit reduction commissions have urged adoption of the Chained CPI for adjusting federal entitlements. President Barack Obama endorsed it for a short time to entice Republicans to agree in return to close some tax loopholes.

One drawback of Chained CPI is that the surveys required and extra processing data takes more time. BLS publishes a preliminary change in the index, makes two interim adjustments during the year and then publishes a final annual inflation about 10 to 12 months later than the CPI-W or CPI-U, both of report their calculations on annual inflation almost immediately.

The greater concern for guardians of federal benefits is that Chained CPI consistently shows inflation .2 to .3 percent lower than traditional indices for measuring annual inflation.

That has made it politically unpopular. Still Republicans generally support the switch for adjusting entitlements. Democrats want to stick with CPI-W or move in the opposite direction, to adjust Social Security and federal pensions using an experimental BLS index, CPI-E, that captures the spending patterns of elderly Americans with their higher health care costs.

Adoption of Chained CPI for tax purposes has sensitized both camps to the billions of dollars at stake for curbing federal costs or dampening benefits if they lose the fight over how federal benefits are protected against inflation.

The stakes are particularly high for military retirees, disabled veterans and their survivors who draw retired pay or service-related compensation at relatively early ages, often years before they also qualify for Social Security.

The Congressional Budget Office estimates that two thirds of the lifetime value of military retirement flows from the full inflation protection their plans provide.

Monique Morrissey at EPI estimates Chained CPI would cut lifetime benefits for military retirees roughly five percent on average, with the sting felt more acutely in old age.

An 85-year old enlisted retiree who left service at age 40 and received COLAs based on Chained CPI would be drawing an annuity worth about 12 percent less than if CPI-W protection is maintained, she said. That assumes Chained CPI reduces COLAs on average by .3 annually, she added.

Send comments to Military Update, P.O. Box 231111, Centreville, VA, 20120, email milupdate@aol.com or twitter: Tom Philpott @Military_Update

Talk to us

More in Local News

Students arriving off the bus get in line to score some waffles during a free pancake and waffle breakfast at Lowell Elementary School on Friday, May 26, 2023, in Everett, Washington. (Ryan Berry / The Herald)
800 free pancakes at Everett’s Lowell Elementary feed the masses

The annual breakfast was started to connect the community and the school, as well as to get people to interact.

Marysville Mayor Jon Nehring speaks at the groundbreaking event for the I-5/SR 529 Interchange project on Tuesday, May 23, 2023 in Marysville, Washington. (Olivia Vanni / The Herald)
$123M project starting on Highway 529 interchange, I-5 HOV lane

A reader wondered why the highway had a lane closure despite not seeing work done. Crews were waiting on the weather.

Justin Bell was convicted earlier this month of first-degree assault for a December 2017 shooting outside a Value Village in Everett. (Caleb Hutton / Herald file)
Court: Snohomish County jurors’ opaque masks didn’t taint verdict

During the pandemic, Justin Bell, 32, went on trial for a shooting. Bell claims his right to an impartial jury was violated.

Gary Fontes uprights a tree that fell over in front of The Fontes Manor — a miniature handmade bed and breakfast — on Friday, May 12, 2023, at his home near Silver Lake in Everett, Washington. (Ryan Berry / The Herald)
Everett’s mini-Frank Lloyd Wright builds neighborhood of extra tiny homes

A tiny lighthouse, a spooky mansion and more: Gary Fontes’ miniature world of architectural wonders is one-twelfth the size of real life.

Will Steffener
Inslee appoints Steffener as Superior Court judge

Attorney Will Steffener will replace Snohomish County Superior Court Judge Janice Ellis, who is retiring in June.

News logo for use with stories about Mill Creek in Snohomish County, WA.
Police: Mill Creek man fatally stabbed wife amid financial woes

After quitting his job at Amazon, the man amassed about $50,000 in debt, triggering a discussion about finances, he told police.

Outside of the current Evergreen Recovery Centers' housing to treat opioid-dependent moms with their kids on Thursday, May 25, 2023 in Everett, Washington. (Olivia Vanni / The Herald)
$8M in behavioral health grants to benefit children, youth, families

Snohomish County awarded one-time federal funding to five projects that will reach at least 440 new people each year.

Cooper Cummings from the United States celebrates after winning a men's downhill during the Cheese Rolling contest at Cooper's Hill in Brockworth, Gloucestershire, Monday May 29, 2023. The Cooper's Hill Cheese-Rolling and Wake is an annual event where participants race down the 200-yard (180 m) long hill chasing a wheel of double gloucester cheese. (AP Photo/Kin Cheung)
Arlington High School grad is the big cheese after winning UK race

Cooper Cummings, who grew up in Lake Stevens, defeated a world record-holder in Cooper’s Hill Cheese Rolling and Wake.

Marysville firefighters respond to a 12-year-old boy who fell down a well Tuesday May 30, 2023 in Marysville, Washington. (Photo provided by Marysville Fire District)
Marysville firefighters save boy who fell 20 feet into well

The 12-year-old child held himself up by grabbing on to a plastic pipe while firefighters worked to save him.

Most Read