Chained CPI, COLAs, & the 2017 Tax Act

February 9, 2018

Learn how chained Consumer Price Index (CPI), cost-of-living adjustments, and the recent 2017 Tax Cuts and Jobs Act affect inflation and retirement planning for your clients.

Tofu instead of chicken in retirement? With all due respect to tofu, I hope not.

But that's the case for retirement plan contribution limits (and the provisions of the Tax Cuts and Jobs Act [TCJA] indexed for inflation, such as tax brackets, the standard deduction, and tax credits).

The 2017 Tax Act ushered in the use of a "chained" Consumer Price Index (CPI) as the measure of inflation used by the federal government for indexing. Inflation, and the resulting bumps in brackets and other numbers tied to cost-of-living adjustments (COLAs), are now determined by the Department of Labor's Chained Consumer Price Index for All Urban Consumers (C-CPI-U).

The C-CPI-U incorporates changes in both the quantities and prices of products and services, rather than a fixed basket of good and services, and attempts to reflect the choices people make when prices go up.  For example, if the price of chicken goes up, many (some?) people may buy tofu instead of chicken as a protein substitute if it costs less. Sales of tofu soar, while the sales of chicken slump. The chained CPI essentially ignores the price increase of chicken on the theory that people aren’t buying it.

What Does This All Mean?

Inflation will track more slowly. So instead of 2% in a given year, it may now be 1.8% based on the new index. This will translate to more modest COLA bumps for brackets and other numbers, such as retirement plan contribution limits, tax brackets, the standard deduction, and tax credits. As with all the other changes made by the 2017 Tax Act, this may serve as a reminder to clients that saving for and spending in retirement in a tax-focused way is still not a do-it-yourself project. Planning the silos for savings and the sources of spending will go a long way in helping clients secure the choice of tofu or chicken in retirement.


Other Key Points

  • Unlike many of the tax changes for individuals under the 2017 Tax Act, chained CPI indexing does NOT sunset after 2025.
  • The calculation of Social Security COLAs is still tied to the CPI-W and was not impacted by this change.
  • Regardless of price increases, not all goods and services may be substituted for lower-priced alternatives, particularly healthcare.

 

Should you have any questions regarding chained CPI indexing, please feel free to contact the Pacific Life Retirement Strategies Group at (800) 722-2333, ext. 3939, or send an email to RSG@PacificLife.com.

Picture of Pacific Life Annuities

Pacific Life offers a broad and diversified range of products and solutions designed to help individuals and families achieve asset growth, sustainable retirement income, and long-term financial independence. We also help businesses manage and fulfill their long-term retirement plan commitments to employees.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency