Social Security reform: What 'chained CPI' proposal by Obama means

President Obama's latest bargaining position in fiscal talks with Republicans contains this controversial element: revising the way Social Security benefits get adjusted each year to help recipients cope with inflation.

Mr. Obama's move is an overture to Republicans who support the idea, as the two sides try to broker a deal that reduces future federal deficits with a mix of tax hikes and spending cuts. 

So what is the "chained CPI," the revised consumer price index that Obama says could replace the current system?

Details will come in a moment, but first this point: A lot of people don't like the president's idea.

As news of the proposal emerged, the idea was swiftly met by opposition from interest groups opposed to benefit cuts in Social Security, the widely popular program on which millions of Americans rely for retirement income.

"Almost every elected official just spent an entire election season saying they wouldn't cut the benefits of those 55 and older," Alex Lawson, director of Social Security Works, said in a statement released Tuesday morning. "The truth is the chained CPI hits everyone's benefits on day one. It hits the oldest of the old and disabled veterans the hardest."

Obama and everyone in Congress know that alterations to Social Security aren't politically easy. Some lawmakers want the program left out of the negotiations entirely as Congress weighs what to do about the "fiscal cliff," the set of tax hikes and federal spending cuts set to occur in the new year if no new legislation is passed.

But entitlement programs including Social Security represent a central part of America's fiscal challenge, say many economists, so it's important to have entitlement programs on the bargaining table. 

Chained CPI is just one of several ideas for reforming Social Security, so that the program is able to finance itself in years and decades ahead. To understand the idea, it's important to define a some terminology:

Consumer price index (CPI). This is the US Labor Department's main index of inflation, or changes in the overall level of consumer prices. If inflation goes up 2 percent (about the pace of CPI change over the past 12 months), then that's how much more it costs a consumer to buy a typical basket of goods and services from food to utilities. In effect, the purchasing power of a consumer's dollar has gone down by 2 percent. 

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