The recently submitted 2014 fiscal budget from President Obama’s Office of Management and Budget was approximately two months late. It incorporates the chained consumer price index (CPI) for all urban consumers, a methodology that would adversely and disproportionately affect those in the lower and middle socioeconomic strata.
The U.S. Bureau of Labor Statistics began publishing this index in August 2002. By incorporating substitution in response to price moves, this measure reflects a change in expenditures, not a change in the price level.
For example, you may elect to purchase 3 percent fewer apples if the price of apples rises 5 percent. In this case, your total expenditures would rise approximately 2 percent. The original CPI measure would record the price increase as 5 percent, but the chained CPI would reflect only a 2 percent rise.
Since Social Security benefits are based on the CPI index, a change to the chained CPI would most definitely lower the growth in Social Security benefits for the foreseeable future and prevent it from keeping pace with the real level of inflation. In addition, the income tax brackets would increase more slowly based on the new chained CPI, thereby subjecting more income to higher tax rates (called “bracket creep”).
As a percentage of income, this recommendation would be more detrimental to those in the lower and middle socioeconomic strata. It is a regressive measure, similar to Social Security and Medicare payroll taxes, and should not be employed.
© 2013 Moneynews. All rights reserved.