Chain of Fools 07/20/2011

Beware of the chained CPI - How Social Security will be cut, your taxes will go up, and you won’t even know it.

The government and economists admit it is difficult to measure cost of living increases, yet they are intrinsic to so many government formulas - one being the COLA adjustments to Social Security, another being the income tax brackets. (The CPI also effects federal pensions and veteran benefits among other things.)

Simply put the CPI-U is a measure of the price of a typical basket of goods purchased by an urban consumer.
But the government thinks that if steak gets too expensive, a typical consumer will switch to hamburger; and if hamburger goes up the switch will be to beans.  So, their thinking goes, the CPI should be adjusted to the increase in the price of beans, not steak.

This works out well for them, because not only does it lower the CPI adjustment to Social Security, it puts us in higher tax brackets.  This is a windfall savings for the government.

The income tax brackets are adjusted based upon the CPI.  If you make $50,000 this year,and you are at the top of your tax bracket, and the CPI is 3%, your bracket will be adjusted to $51,500.  That means you can get a 3% raise without going into the next bracket.

By chaining the CPI, the adjustment would be lowered, say to 2.5%.  If you get a 3% raise, 0.5% of your new income would end up in a higher bracket.  This is a windfall tax increase for the government and effects mostly the lower brackets.

This is how government works - they will be able to cut the deficit by cutting money to seniors and raising taxes on the lower income brackets without you even knowing about it.

That’s how government works.