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FACTBOX-How 'chained' CPI changes U.S. Social Security, tax brackets

Source: Thomson Reuters Foundation - Mon, 8 Apr 2013 16:24 GMT
Author: Reuters
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WASHINGTON, April 8 (Reuters) - U.S. President Barack Obama is expected to formally propose this week for the first time a controversial change in how the government calculates inflation for Social Security and other federal benefits, in a bid to lure Republicans into a broad deficit-cutting deal.

The switch, due to be included in the president's 2014 budget proposal, also affects how tax brackets are calculated, so that they rise more slowly. That would impact taxpayers by moving them into higher tax brackets more quickly as their income increases.

Below are some facts about how moving to the new measure of the consumer price index, known as "chained" CPI, works.

* The Social Security retirement program and other government benefits are recalculated annually for cost-of-living adjustments based on changes in the consumer price index as measured by the Bureau of Labor Statistics.

* Some economists argue that CPI does not accurately measure inflation because it does not account for changes in consumer buying habits. For example, if pork prices rise more than beef prices, consumers might buy more beef.

* In 2002 the BLS introduced a "chained" CPI measurement designed to reflect such adjustments, as a complement to its traditional inflation gauge.

* Obama and Republican leaders in the House of Representatives both backed the idea during last year's fiscal cliff talks.

* Opponents including the AARP seniors group say the chained CPI is a backdoor way to reduce Social Security benefits.

* Vulnerable populations will be exempted from the change under the White House plan, an administration official said.

* The Congressional Budget Office in March 2011 estimated a chained CPI calculation would save the federal government ${esc.dollar}112 billion from 2012 through 2021.

* The president's 2010 Simpson-Bowles deficit reduction commission called for a switch to chained CPI calculations for Social Security benefits.

* On the tax bracket side, the Tax Policy Center estimates that three-quarters of households would see a tax hike in moving to chained CPI. The switch hits middle-class taxpayers most harshly, with taxpayers making between ${esc.dollar}30,000 and ${esc.dollar}40,000 a year seeing the biggest tax bump. (Reporting By Kim Dixon and Patrick Temple-West; Editing by Eric Beech)

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