The Social Security Administration recently announced a 3.6 percent increase in monthly Social Security and Supplemental Security Income (SSI) benefits for 2027, aimed at aligning benefits with inflation. However, Congress uses different inflation measures for adjusting government benefit programs compared to those applied to income tax brackets. Currently, SSI and similar programs rely on variations of the Consumer Price Index (CPI), which have methodological flaws that can overstate inflation by not adequately accounting for how consumer spending shifts in response to price changes. This discrepancy leads to benefit increases that go beyond what rising prices warrant, ultimately costing taxpayers.
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Congress uses a more precise measure, the chained CPI-U, for the tax code, creating an inconsistency in how inflation is accounted for across different programs. While the tax brackets adjust more slowly under chained CPI-U, benefits and eligibility thresholds rise more rapidly under the outdated CPI methods. Advocates are pushing for Congress to standardize benefits indexing to chained CPI-U to rectify this issue.
The Bureau of Labor Statistics (BLS) employs the CPI to track price changes for a basket of goods and services purchased by consumers. Benefits such as Social Security and SSI are adjusted using CPI-W, which reflects prices paid by urban wage earners, representing about 30 percent of the U.S. population. In contrast, CPI-U covers prices paid by over 90 percent of urban consumers. Other programs, such as food assistance, use CPI-U to set benefits and income eligibility limits.
Both CPI-W and CPI-U fail to incorporate the substitution effect, where consumers switch between goods as prices fluctuate, leading to overestimated inflation figures. In 2002, the BLS introduced chained CPI-U, which incorporates these changes in spending behavior and is viewed by the Congressional Budget Office (CBO) as a more accurate reflection of cost-of-living variations.
Research by Cato scholar John Early estimates that from 1975 to 2021, indexed adjustments to Social Security, SSI, food stamps, Medicaid, and CHIP based on chained CPI-U could have saved taxpayers over $2.6 trillion. Looking forward, savings associated with Social Security benefits could reach $188 billion over the next decade, with additional welfare program savings exceeding $90 billion.
While opponents of the chained CPI argue it may lead to reduced eligibility and slower growth of benefits—especially affecting low-income households that may experience higher inflation due to rent costs—these concerns do not justify the continued use of flawed CPI metrics. Addressing the adequacy of benefits and eligibility for programs should happen through direct legislative debate rather than reliance on an inaccurate inflation measurement.
In 2017, Congress transitioned the inflation index for income tax brackets to chained CPI-U, resulting in slower tax bracket adjustments and increased federal revenue. However, a similar adjustment for benefit programs has not been made, placing additional burdens on taxpayers who face both slower tax bracket increases and automatic benefit hikes linked to a biased inflation index.
With a reconciliation bill on the horizon, lawmakers have an opportunity to require that all benefit programs utilizing inflation for adjustments switch to chained CPI-U, creating a more equitable system that reflects true price growth and aiding in sustainable fiscal policy.