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Will SSDI Cost-of-living Increase Be a Casualty of the Fiscal Cliff?

Posted on Dec 15, 2012

The “fiscal cliff” refers to changes under the Budget Control Act of 2011 that are scheduled to take effect at midnight on December 31, 2012—including across-the-board spending cuts, the end of certain tax cuts and the start of taxes related to the health care reform law. If U.S. lawmakers cannot agree on an alternative plan, and thus far the two parties have not been able to do so, these changes will take effect as we head into the new year.

The Republican Party would like to avert the “fiscal cliff” by reducing government spending. One of the casualties included in the Republican plan is the cost-of-living adjustment for Social Security beneficiaries. According to NPR, the Republicans argue that the inflation adjustment used in calculating cost-of-living increases for federal benefits such as SSDI overstates the actual impact of inflation.

Apparently they believe that a $19-per-month cost-of-living increase for the average Social Security disability recipient is overly generous. Meanwhile, unless they vote against it, members of Congress are set to automatically receive an annual pay increase in 2013 of as much as approximately $1,900 each.

Cost-of-living adjustments to Social Security benefits were first made in 1975. These adjustments are based on inflation as measured by the Consumer Price Index. The CPI essentially measures inflation as the cost of a basket of goods. NPR explained that some economists believe that a different index better reflects actual consumer behavior. That index, referred to as the chained CPI, takes into account the fact that consumers typically substitute lower-cost items for those that increase substantially in price. For example, if the price of fresh fruit rises dramatically, people will replace the fresh fruit in their “basket” with canned or frozen fruit or something else that costs less.

On the surface, the difference between the cost-of-living adjustment using the CPI versus the chained CPI would appear to be minimal for the average person receiving Social Security benefits, with the cost-of-living increase being only slightly less when the chained CPI calculation is used. But, in the case of someone who receives benefits for two or three decades or longer, the cumulative effect, along with compounding, could amount to a relatively significant reduction in benefits.

Congressional Democrats and seniors' groups, including AARP, maintain that the chained CPI underestimates inflation costs for seniors and other people who spend more on health care than the average person does, because health care costs increase at a rate that exceeds general inflation.

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John L. Keefe
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