CPI Change Would Hit Middle- and Lower-Income Americans Hardest

Jul 6, 2011
WASHINGTON – Ways and Means Ranking Member Sander Levin (D-MI) today released a Joint Committee on Taxation report prepared at his request that shows how the proposal to move to a “chained” Consumer Price Index for purposes of indexing the income tax and making cost-of-living adjustments to Social Security benefits would hit lower- and middle-income Americans the hardest. The “chained” CPI is an alternative Bureau of Labor Statistics index that shows a lower inflation rate than the standard calculation.
 
“A change to a chained CPI would place new burdens mainly on the backs of seniors, middle-income, and low-income Americans,” said Ranking Member Levin. “Any proposals to change our tax code must bear in mind this stark reality: Since 1976, 58 percent of the income growth in the United States went to the top 10 percent of earners.”
 
Key findings from JCT distributional analysis of substituting a chained CPI for CPI-U
 
  • The cost of changing to a chained CPI measure of inflation falls disproportionately on middle-income and low-income Americans. More than two-thirds (69 percent) of revenue gains in 2021 alone would come from increased taxes on taxpayers with income below $100,000. (See Page 5 of analysis).
  • Looking at 2021 alone, the average change in tax liability for all taxpayers would be 0.3%. Further into the future, the share of the burden falling on lower incomes will only continue to grow. In 2021, the increased tax liability for:
Incomes between $10,000 and $20,000: 14.5%
Incomes between $20,000 and $30,000: 3.5%
Incomes of $1 million and above: 0.1%
Key Findings from analysis by Social Security’s Chief Actuary in response to request from Social Security Ranking Member Xavier Becerra (Impact on Social Security)
 
·         The chained CPI is a badly-designed Social Security benefit cut. Unlike other benefit cuts that have been discussed, it would hit current Social Security recipients and those very close to retirement, as well as future Social Security beneficiaries. According to Social Security’s Chief Actuary: “[Adopting the chained CPI] would affect all individuals eligible for any OASDI benefit for December 2012 or later, regardless of their age or how long they may have received benefits prior to that date.”
·         Adopting the chained CPI also disproportionately harms the oldest Social Security beneficiaries, who are already the most likely to be poor.  The Chief Actuary estimates that the reduced Cost of Living Adjustment (COLA) would result in a decrease of about $130 a year (0.9 percent) in annual benefits for a typical 65-year-old.  Because the  cut grows every year (relative to scheduled benefits), by the time that senior is 95, the annual benefit cut will be almost $1,400 (9.2 percent). Social Security’s oldest beneficiaries, mostly women who have outlived their non-Social Security sources of income, are significantly poorer than younger beneficiaries and rely on Social Security more. That means the seniors who rely the most on Social Security to pay for basic necessities would suffer the biggest benefit cuts from changing to a  chained CPI measure of inflation.

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