Mandatory Spending

Multiple Budget Functions

Use an Alternative Measure of Inflation to Index Social Security and Other Mandatory Programs

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of dollars			2025	2026	2027	2028	2029	2030	2031	2032	2033	2034	2025– 2029	2025– 2034
Change in outlays
	Social Security		0	-2.9	-7.2	-11.8	-16.6	-21.9	-27.3	-33.0	-38.8	-44.7	-38.5	-204.2
	Other benefit programs with COLAs^a		0	-0.8	-1.9	-3.1	-4.4	-5.4	-6.7	-8.0	-9.4	-10.8	-10.2	-50.5
	Effects on SNAP from interactions with COLA programs^b		0	0.1	0.2	0.3	0.4	0.5	0.6	0.7	0.8	0.9	1.0	4.5
	Health programs^c		0	-0.4	-0.9	-1.4	-1.8	-2.5	-3.4	-6.5	-5.0	-5.6	-4.5	-27.5
	Other federal spending^d		0	*	-0.1	-0.2	-0.3	-0.4	-0.5	-0.7	-0.8	-1.0	-0.6	-4.0
		Total	0	-4.0	-9.9	-16.2	-22.7	-29.7	-37.3	-47.5	-53.2	-61.2	-52.8	-281.7
Change in revenues^e			0	-0.1	-0.1	-0.1	-0.2	-0.2	-0.2	-0.8	-0.9	-1.1	-0.5	-3.7
Decrease (-) in the deficit			0	-3.9	-9.8	-16.1	-22.5	-29.5	-37.1	-46.7	-52.3	-60.1	-52.3	-278.0

Data sources: Congressional Budget Office; staff of the Joint Committee on Taxation.

This option would take effect in January 2026.

Estimates displayed in this table include budgetary effects for Social Security benefits; that spending is classified as off-budget.

COLA = cost-of-living adjustment; SNAP = Supplemental Nutrition Assistance Program; * = between -$50 million and zero.

a. Other benefit programs with COLAs include civil service retirement, military retirement, Supplemental Security Income, veterans' pensions and compensation, and other retirement programs whose COLAs are linked directly to those for Social Security or civil service retirement.

b. The policy change would reduce payments from other federal programs to people who also receive benefits from SNAP. Because SNAP benefits are based on a formula that considers such income, a decrease in those other payments would lead to an increase in SNAP benefits.

c. Outlays for health programs consist of spending for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children's Health Insurance Program, as well as outlays to subsidize health insurance purchased through the marketplaces established by the Affordable Care Act and related spending.

d. Other federal spending includes changes to benefits and various aspects (eligibility thresholds, funding levels, and payment rates, for instance) of other federal programs, such as those providing Pell grants and student loans, SNAP, child nutrition programs, and programs (other than health programs) linked to the federal poverty guidelines. (The changes in spending on SNAP included here are those besides the changes in benefits that result from interactions with COLA programs.)

e. The effects on revenues reflect slightly higher enrollment in employment-based health insurance coverage under the option.

Cost-of-living adjustments (COLAs) for Social Security and many other parameters of federal programs are indexed to increases in traditional measures of the consumer price index (CPI). The CPI measures overall inflation and is calculated by the Bureau of Labor Statistics (BLS). In addition to the traditional measures of the CPI, BLS computes another measure of inflation—the chained CPI—which is designed to account for changes in spending patterns and to eliminate several types of statistical biases that exist in the traditional CPI measures. Under current law, the chained CPI is used for indexing most parameters of the tax system, including the individual income tax brackets. Since 2001, the chained CPI has grown by an average of about 0.25 percentage points more slowly per year than the traditional CPI measures have, and the Congressional Budget Office expects that trend to continue.

This option would expand the use of the chained CPI. The chained CPI would be used to determine COLAs for some programs, such as Social Security and veterans' pensions and compensation, and to compute inflation-indexed parameters of some programs, such as Medicaid.

Information about the long-term and distributional effects of this option appear in the following tables.

Table A-13. Long-Term Effects on Social Security's Finances
Percent
		Under current law	Change from current law
Spending, as a percentage of GDP
	Calendar year 2054	5.9	-0.2
	Calendar year 2098	6.7	-0.2
The 75-year actuarial balance for the combined OASDI trust funds^a
	As a percentage of GDP	-1.5	0.2
	As a percentage of taxable payroll	-4.3	0.5
The exhaustion year for the balance of the combined OASDI trust funds (fiscal year)		2034	No change

CPI = consumer price index; GDP = gross domestic product; OASDI = Old-Age, Survivors, and Disability Insurance.

Under this option, the chained CPI would be used to determine cost-of-living adjustments for Social Security. The analysis of long-term effects on Social Security in this table does not consider the effects of using the chained CPI for other mandatory programs.

The estimates displayed in this table assume that benefits will be paid as scheduled under the Social Security Act, regardless of the balances in the trust funds.

a. The actuarial balance is the sum of the present value of projected income and the current trust fund balance, minus the sum of the present value of projected outlays and a year's worth of benefits at the end of the period. For Social Security, that balance is traditionally presented as a percentage of the present value of GDP or of taxable payroll over 75 years. (A present-value estimate translates a flow of current and future income or payments into an equivalent lump-sum value today.)

Table A-14. Distributional Effects
	Under current law			Change from current law^a
Lifetime household earnings quintile^b	Birth year 1960–1969	Birth year 1970–1979	Birth year 1980–1989	Birth year 1960–1969	Birth year 1970–1979	Birth year 1980–1989
	Average annual benefits for retired workers if they claimed benefits at age 65^c
	(thousands of 2024 dollars)			(percent)
Lowest	12	13	14	*	*	*
Middle	23	24	26	*	*	*
Highest	32	35	39	*	*	*
	Average lifetime benefits relative to average lifetime earnings for beneficiaries (percent)^d
Lowest	31	32	31	-2	-3	-3
Middle	17	18	18	-3	-3	-3
Highest	8	7	7	-3	-3	-3
	Ratio of average Social Security benefits to average payroll taxes over beneficiaries' lifetime^e
Lowest	2.6	2.7	2.5	-2	-3	-3
Middle	1.4	1.5	1.5	-3	-3	-3
Highest	1.0	1.0	0.9	-3	-3	-3

CPI = consumer price index; * = between -1 percent and zero.

Under this option, the chained CPI would be used to determine cost-of-living adjustments for Social Security. The analysis of distributional effects on Social Security in this table does not consider the effects of using the chained CPI for other mandatory programs.

The estimates displayed in this table assume that benefits will be paid as scheduled under the Social Security Act, regardless of the balances in the trust funds.

a. Effects are measured as a percentage change from the current-law value. For example, under current law, the average lifetime benefits for low earners born in the 1960s will be 31 percent of lifetime earnings. The 1 percentage-point decrease in that ratio—from 31 percent to 30 percent—is expressed as a 2 percent decrease in this table.

b. The lowest, middle, and highest fifths of people within a 10-year birth cohort ranked by lifetime household earnings. For someone who is single in all years, lifetime household earnings equal the present value of inflation-adjusted earnings over that person's lifetime. In any year in which a person is married, lifetime household earnings equal the average of the couple's earnings, adjusted for economies of scale in household consumption.

c. CBO projected the benefit amounts that retired workers would receive in their first year of receiving such benefits if they began claiming them at age 65. To remove the effects of inflation on those benefits, CBO used the price index for all goods and services that make up gross domestic product. The agency computed those benefits for all people who are eligible to claim retirement benefits at age 62 and who have not yet claimed any other Social Security benefits. All amounts are net of income taxes paid on benefits.

d. Lifetime benefits include the present value of all Social Security benefits except those received by young widows, young spouses, and children, which are excluded from this measure because of insufficient data for years before 1984. To calculate present value, CBO adjusted the amounts to remove the effects of inflation and discounted the amounts to age 65. (A present-value estimate translates a flow of current and future income or payments into an equivalent lump-sum value today.)

e. Lifetime payroll taxes consist of the present value of the employer's and employee's shares of Social Security payroll taxes. To calculate present value, CBO adjusted the amounts to remove the effects of inflation and discounted the amounts to age 65.