updated 4/6/2013 7:18:41 PM ET 2013-04-06T23:18:41

President Obama's controversial budget proposal uses a formula called "chained CPI." Here's what you need to know about how it's calculated, and how it may affect you.

And you thought the term “sequestration” was bad…

Details of President Obama’s proposed budget leaked on Friday, signaling his intention to cut Social Security and other benefit programs by way of a revised inflation adjustment known as “chained CPI.”

The proposed budget–expected to be released next week–enraged many on the left, who felt Obama had betrayed “the core of the progressive and Democratic legacy,” said Stephanie Taylor, co-founder of the Progressive Change Campaign Committee, in a statement on Friday. Critics on the right were also angered by the rumored cuts, which House Speaker John Boehner belittled as, well, too little. “If the president believes these modest entitlement savings are needed to help shore up these programs, there’s no reason they should be held hostage for more tax hikes,” he said in statement released Friday. “That’s no way to lead and move the country forward.”

But while many commentators were busy being outraged, others were merely confused. So for those of you wondering, “What the heck is ‘chained CPI,’ and why is everyone so mad about it?” here are some FAQs.

What is the CPI?

The consumer price index, or CPI, is a formula that measures the prices of goods and services we buy and how they change over time. These goods and services include everything with a price tag, like food, housing, and clothing. The CPI is used to calculate cost-of-living adjustments–COLA–which affect how much money you receive from programs like Social Security. When cost-of-living-adjustments go up, you get a bigger check from the federal government.

How is that different from “chained CPI?”

The chained CPI slows the growth of entitlement programs by assuming that when prices go up for something, people switch to cheaper substitutes. That is, if the price of steak goes up, people will skip the steak and buy chicken instead. And if people aren’t necessarily paying more for their goods, they don’t need their benefits to rise. Estimates show that under the chained CPI, your cost-of-living adjustment would be about .3 percentage points below what it would be under the plain CPI, which means you won’t see as big an increase in your Social Security check.

Can I see an example?

Sure. Let’s say your monthly Social Security check last year was $2,000. Using the CPI, the Social Security Administration found that the cost of living adjustment for this year was 1.7 percent. To calculate your new social security check, you take last year’s check and multiply it by your cost of living adjustment (COLA) for this year. You then add the result to last year’s check to get the new number. So here we go: 2,000 x .017 = 34. Using the CPI, your monthly Social Security check would have increased from $2,000 to $2,034.

Using the chained CPI, your COLA comes out to .3 percentage points lower–so instead of 1.7 percent, it’s now 1.4. 2,000 X .014 = 28. Your monthly Social Security check is now $2,028–$72 less a year than you would be getting using the plain CPI formula. Sounds tiny? The switch could save $130 billion.

What are the drawbacks?

Pay attention: this is the key part. Some analysts fear the chained CPI switch unfairly burdens seniors, who tend to have more health care needs–which, unlike food or clothing choices, are not “elastic.” If you need blood-pressure medication, you still need it even if (or when) the price rises. You can’t simply choose to have a different medical condition that happens to be cheaper to treat. And if you’re not free to substitute chicken for steak, the fundamental economic assumption that drives the chained CPI no longer applies. “Seniors have a different consumption basket from the young, one that includes more medical expenses, and [they] probably face true inflation that’s higher, not lower, than the official measure,” wrotePaul Krugman in The New York Times Friday. “This is, purely and simply, a benefit cut.”

For more, watch host Chris Matthews and Gene Sperling–director of the National Economic Council and Assistant to the President for Economic Policy–talk deficit reduction and political courage on Hardball Friday.

Video: Obama proposes adjustments to Social Security, Medicare

  1. Closed captioning of: Obama proposes adjustments to Social Security, Medicare

    >> the president sticks his neck out. let's play "hardball."

    >>> good evening. i'm chris matthews in washington. let me start tonight with the president who's doing the right thing. there was once a congressman from massachusetts, jimmy burke was his name. he voted against every tax increase. he voted for every benefit increase. every time a bill came before the congress to raise taxes, burke was a sure vote against it. every time somebody wanted to curb the growth in spending, our guy was right there with a nay. it was simple. people didn't want their taxes raised. people never did. people didn't like the benefits cut. he never, ever voted to cut them. somebody asked burke once, why do you do that? all you're doing is causing the government to go bankrupt. why do you vote like that? why shouldn't i? he said. too many politicians do just what burke did and get away with it. they never put up nor do they shut up. they complain about the debt but vote against all tax hikes, against all attempts to cut back on spending. today president obama did something politicians don't like to do, he came out and said, we need to do two things. we need to do what we like, and they don't like doing it. raise revenues, and hold back on spending. he took the first step, himself, in the hopes others will follow, that others will join him in doing the right thing. the gutsy thing. the president proposed adjusting social security cost of living . he proposed savings in medicare . he wants republicans to join him by making more upward adjustments on the revenue side of the books. in other words, he's being a leader. not a bad way to end the week. gene sperling is director of the national economic counsel. assistant to the president for economic policy . as i said, he stuck his neck out tonight. he's a leader, he's saying, look, i can do things on the spending side, make adjustments. we can help reduce the debt over time significantly. now i want to be followed by republicans as well as the democrats in doing something on the revenue side. there are risks to doing this. why did the president take the risk?

    >> look, because our goal, every day what we do here is focus on what's going to strengthen job creation and help the middle class . and right now, we are weighing down this economy with a sequester that's going to cost hundreds of thousands of jobs. and uncertainty about our fiscal future. and uncertainty created by manufactured crisis because we don't have the ability in washington right now to compromise. now, the president put forward today not his ideal budget . he put forward a compromise offer that he had done, given to speaker boehner , and it included some very tough things but it asked for sensible entitlement reforms that strengthen those core benefit programs. medicare , social security . it asks for revenue savings in the very way that speaker boehner had asked for it just months ago. not by raising rates more. by tax reform that would close loopholes and tax expenditures and apply it to deficit reduction.

    >> i think you're right.

    >> we can do this while we still invest in the future, but you're right, just what you said. you know, you're not going to get this compromise unless everybody's willing to give, everybody's willing to show a little courage and a little compromise and the president's leading by doing so.

    >> i can follow this, jean, pretty much through having worked on the senate budget committee . i see it getting probably through the senate. you've got enough votes to get it through, i think. then i can see it getting to the house then i see paul ryan carving up his ayn rand theories. if you do the right thing, get it through the senate but in the end the budget process proceeds through may and perhaps into june, you end up having a log jam on the other side. what happens then? what happens then?

    >> well, let me make a couple points. number one, we were very close with speaker boehner last fall. let's remember, he had $1 trillion of revenues on the table as part of a deal with serious entitlement savings . he's pulled that back completely. even though only 60% of that, of that kind of revenue increase was passed. so we've been close. unfortunately, they've decided to take, as you mentioned, an absolutist position which does not help us compromise. secondly, you know, what do we teach our kids? government? we teach that when a bill passes the house and senate, it can two to a conference report.

    >> i know.

    >> both houses and both parties can work together. we ought to give that a chance.

    >> i see what you're doing. you're going the right road here. going to try to get a budget , going to try to get a compromise. here's boehner 's reaction. here's boehner 's reaction here. "if the president believes those modest entitlement savings are needed to shore up these problems, there's no reason they should be held hostage for more tax hikes. that's no way to lead the country." this is like the russians, the soviets used to be. i'll take what you're offering then we'll negotiate back from there. he's not giving anything here.

    >> yeah, let's think about what that position is, and i think how few people at home would support that. he's saying that as part of a larger deficit reduction plan which is part of an economic strategy to strengthen jobs in our economy, that there's not, are you ready for this? there's not one single penny, not one, that you can get from any tax expenditure , any special interest tax break , any loophole for the most well-off american that you can apply for deficit reduction. wro you know, i just do believe that there are sense ible republicans and democrats who want to be part of what the president said is a common sense caucus. and they understand that if you're going to do a sensible entitlement savings that that's tough and that you need to do it as part of a broader package. it's good for jobs. good for growth. but also asks everybody to do their part.

    >> i agree with you.

    >> how can we say there's not a penny when this speaker, himself, just months ago said there was $1 trillion in savings from the very type of tax reform the president's calling for that could be used for deficit reduction? we just need the speaker to remember his position that he had in november and december.

    >> okay. i'm agreeing with you. here's the president here. this is what you must have known, gene, when you stuck your neck out. here's james dean , the brother of howard dean . no surprise howard dean 's people are going to cause trouble. they're on the other side sometimes. it's called democracy in america, whatever. he says "let's be clear, president obama when it comes to cutting social security , medicaid , medicare benefits, over 200,000 progressive members of your own party don't have your back and we're going to fight you every step of the way." when you decided to do this, did you calculate that these usual voices who have organized to make these kind of arguments, and they're fair enough, i sometimes agree with them, did you know they were going to come at you?

    >> look, you know, compromise and deficit reduction, they're always difficult. what i would say to some of our progressive friends is let's remember a few things. the president's doing this in the context of a budget where he's protecting medicaid so that we can have a major expansion of the affordable care act and help 30 million americans get coverage. when, as opposed to the republican house budget that would cut medicaid by $800 billion, that's what the president's fighting for. yes, the president has some medicare savings , but he's rejecting vouchers, premiums. he's doing medicare savings that are designed to protect the core benefit of this program. and he's trying to do a sensible way of deficit reduction so we don't have this sequester that is going to hurt children, it's going to hurt veterans, it's going to hurt civilian military retirees, it's going to hurt our research in our future. so i think you have to look at the whole budget . this is a president who has fought hard for tax cuts that help low-income, hard-pressed families. he's fought hard to protect medicaid . that's also in this budget . and that's also what we achieve when we have the type of compromise the president is calling for.

    >> i haven't read budget yet. haven't seen it yet. so far i agree with everything you're trying to do. thanks so much, gene sperling , from the white house .

    >>> joy reid is managing editor of the grio and msnbc contributor. joy, you and i think like normally. i think normally i think somebody has to lead. and it's one of those things almost like in a kidnapping you have to, you know, i want the baby back, here's your 100,000 bucks. you know, you have to do it at exactly the same time. in this case the republicans didn't want to do it the exact same time. the democrats , the president has to lead. i think it has trickiness involved in it. we'll see.

    >> i think you're right in the sense the president is doing like what you said a hostage exchange. he's saysing we know republicans want something very specific. they would like to cut entitlements. just to set the stage here, democrats should understand, republicans would like to either raise the retirement age or deeply cut entitlements either by doing it that way or by privatizing the program. okay? that's the stage that we're working in. the president is saying i'm not going to do either of those things but i will give some entitlement cuts. but i'm only giving you that, republicans , if you give me revenues. you have to give me something that i want which is revenues in order to get the thing you really, really want which is to cut social security . democrats , of course, hate this and take an absolutist position on cutting social security benefits for a good reason because of what i just said. they know what republicans really want to do and don't want to open the door . if you look at the president's proposal, he's not talking about medicaid and medicare cuts. he's talking about going to chain cpi which is a slight change. it does cut benefits. let's be clear about that. but in return, he's looking for revenue and investments, things like universal pre-k. as gene sperling said, these tax look hole changes to how much you can put into your i.r.a. that could impact the wealthy. the president is trying to do a delicate dance here knowing probably nancy pelosi could deliver the votes in the house, probably harry reid could do it in the senate, but will republicans give something that they've already offered before to get something?

    >> we don't have to get even farther down the road here because as i was running it through, game planning it here, once they put it up there in the senate, get it through the democratic senate what we're talking about with some revenue enhancement, thai going to have to go to the house side and get a conference agreement. at some point the danger here, of course, is the congress, itself, will grab hold of the cuts.

    >> that's right.

    >> on the benefits side. put them into a budget , but them into a reconciliation bill and the president will end up with cuts he's agreed to without getting revenues he's wanted. there's always a tricky part of that. polling wise, this puts the president on the political good side of the angels. a recent mclatch/marist poll. when asked who they trust more to make the right decision on the budget , half say the president compared to 41%. he has a substantial advantage over them. when asked who's responsible when the party is in gridlock? 34% blame the president. he goes into the fight with street credit. obama is trying to do the right thing. i know some people on the very hard lost, maybe professional left to use a terrible phrase, who aren't going to go along with anything he does. i tell you, sometimes you just have to get off the dime to put it bluntly.

    >> the thing is because the president keeps offering things that are substantive, he's really giving something that's painful to his side. that's why the public always sees him as the guy who's willing to compromise. he doesn't give away petty things. he gives away real --

    >> cpi .

    >> chain cpi is something real. by the way, the little secret some departments don't say, center for budget priorities said they're okay with it if you exempt the floor by not having --

    >> the conscience.

    >> the center for american progress proposed going to chain cpi back in 2010 in a big paper they did on social security . these are ideas that are not foreign to left. democrats , again, take an absolutist position. they don't want to open the door to cutting benefits.

    >> bob greenstein , by the way, is god on this stuff, from the center of public policy priority. if he says it's all right in a certain context, i can't help but with with him. joy, thank you so much. once again, we are of similar mind.

    >> we are of same mind i think on this one for the most part.

    >>> coming up, you saw "hardball" last night and heard the all-out prefurefusal of the gun lobby to not allow a vote. to keep americans scared and of course armed to the teeth .

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