Photo: Wikimedia Commons
Part of the Gang of Six’s plan to reduce the deficit includes changing the way we calculate the price of essential consumer goods and the cost of living in the United States.Introducing the “Chained Consumer Price Index” (C-CPI).
But what the heck is it?
The C-CPI assumes that consumers are making different choices right now. Because of the economic down-turn, they’re substituting cheaper products for the ones they used to buy (say, going for the cheaper apple versus a more expensive peach at the supermarket, or buying cat food instead of ground beef). It presumes that consumers are effectively changing the real CPI number.
Using the C-CPI, rates would re-calibrate every two years according to a reading of consumer spending. And since Social Security is linked to the CPI, it has the potential to reduce social security payments.
They call it “chained” because it will be tied to actual spending, instead of being a fixed basket of goods like the current CPI. Go figure.
Basically, C-CPI proponents say we’re over-stating the rate of inflation by about 0.3%. That doesn’t sound like a lot, but its a technical fix economists think that, over 10 years, could shave $300 billion off the deficit. Also, the idea is that since 0.3% is such a small number, we won’t start seeing the benefits for a while down the road, so it won’t hurt the fragile economy right now.
Also, the hope is that in the short-term this move will reassure financial markets that we’re on the right track to figuring out our debt issues.
How will this effect you and Grandma? Well, since spending on government programs (like social security) will be calculated based on C-CPI (as they are now on CPI), their cost will go down, and people’s benefits will be cut.
It should also bring up taxes slightly by slowing the rate at which tax brackets and deductions rise. According to Congress’ Joint Committee On Taxation, that should mostly affect people in low and middle income tax brackets.
For example, if the chained CPI were enacted in December 2012, in 2021 the tax liability of low-income workers with incomes between $10,000 and $20,000 would increase by 14.5 per cent, while those with incomes of $1 million and above would see only a 0.1% increase, according to the report.
Even families so poor that they’re eligible for tax exemptions would feel the burn. That’s because some low-income tax credits would disappear all-together for workers who now receive them in full — the Earned Income Tax Credit (EITC), the Child Tax Credit and the Saver’s Credit are some examples.