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The 1 GOP Tax Provision Social Security Recipients Must Be Aware Of

Sean Williams, The Motley Fool

Put plainly, major legislation has been a struggle for President Trump and the Republican-led 115th Congress. Multiple attempts at passing healthcare reform were made earlier this year, but to no avail, despite controlling a majority of seats in the House and Senate. That looks to change with individual and corporate income-tax reform.

On Nov. 16, the House passed its version of tax reform, known as the Tax Cuts and Jobs Act. It stuck to many of the core principles President Trump had outlined during his campaign, including a shrinkage of individual and corporate tax rates, and a simplification of the U.S. tax code. Not too long thereafter, the Senate also passed its own tax-reform bill by the narrowest of margins (51 to 49).  Finally, on Dec. 13, both houses agreed to a final proposal that they hope to send to President Trump's desk to be signed into law.

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Introducing the Chained CPI

However, one similarity shared by these bills is something that all Social Security beneficiaries needs to be aware of. Both the Tax Cuts and Jobs Act and Senate tax reform bill abandon the current inflationary tether, the Consumer Price Index for All Urban Consumers (CPI-U), for all tax provisions, and replace it with the Chained Consumer Price Index, or Chained CPI.

Think of the CPI-U as an all-encompassing inflationary measure that takes into account the buying habits of tens of millions of people and households. Comparatively, the Chained CPI does the same thing, but with one pretty significant twist. The Chained CPI takes into account the idea of substitution bias. If the price of a good or service gets too pricey, the Chained CPI assumes that consumers will trade down to a cheaper good or service. The CPI-U, and pretty much every other measure of inflation, doesn't assume this.

So, what happens if the Chained CPI is introduced and displaces the CPI-U? In simple terms, inflationary adjustments would move slower, since substitution bias is taken into account. It would, effectively, act as a long-term tax increase for certain working Americans. For instance, if the income ranges attached to a tax bracket grew at a slower pace than wages, it would mean more folks would move into a higher tax bracket over time. 

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The Chained CPI could hit Social Security beneficiaries right in their wallets

For Social Security recipients, this isn't a big concern since they're often retired by the time they begin receiving benefits. But the switch to the Chained CPI could have broader implications.

Among the many solutions the GOP have proposed to close a $12.5 trillion budget gap in Social Security is a switch away from Social Security's inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), toward the Chained CPI. As noted, the primary difference here is the Chained CPI takes into account substitution bias, whereas the CPI-W does not. The end result would be smaller inflationary cost-of-living adjustments (COLA) for Social Security beneficiaries.

While switching to the Chained CPI has been a proposal of the GOP for some time, it's gained very little momentum on Capitol Hill. However, with both the House and Senate tax bills incorporating the Chained CPI for tax provisions, it wouldn't take much for Republicans to then propose doing the same for Social Security, and thusly save the program money over the long run by reducing annual COLAs. Though the Chained CPI could help extend the life of Social Security, which is staring down an asset reserve depletion date of 2034, it would further reduce the purchasing power of Social Security dollars, which according to The Senior Citizens League have fallen by 30% since 2000. 

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Change isn't a forgone conclusion

However, there are no guarantees that the Chained CPI will eventually be applied to Social Security.

Altering Social Security's COLA tether would require a majority vote in the House and Senate. While the House is firmly in control of the GOP, the Senate has just a one-seat majority at the moment, which could shrink even further in 2018. Of those Republicans, not all are on the same page when it comes to reforming Social Security or its inflationary tether. Therefore, Social Security beneficiaries could still find their payouts protected from the slower-growing Chained CPI.

Nonetheless, Social Security recipients have no choice, given the long-running desire of the GOP to change how COLA is calculated, but to pay close attention to the current GOP tax reform and any future debates surrounding COLA and the Chained CPI.

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