Switching Inflation Measure Makes Sense Only Under Certain Conditions
A Washington Post editorial today cited a CBPP report in recommending, as part of a long-term budget deal, a different measure of inflation for annually adjusting various federal benefit programs and parts of the tax code. Switching from the regular Consumer Price Index (CPI) to the “chained” CPI would gradually trim benefit programs and boost tax revenues.
Because many economists believe the official CPI is slightly upwardly biased and regard the chained CPI as a more accurate measure of inflation, CBPP has suggested that the chained CPI be on the table in deficit-reduction negotiations — but only if it includes several adjustments to prevent significant hardship.
The policy amounts to a reduction in future Social Security benefits, which many find objectionable. For the chained CPI to be a reasonable component of a comprehensive package, it should:
- Apply to both benefit programs and the tax code, and the proceeds from applying the chained CPI to the tax code should go entirely for deficit reduction. Using some or all of the proceeds to finance a cut in tax rates should not be acceptable.
- Include a modest benefit increase (or “bump”) for long-time Social Security beneficiaries. Switching to the chained CPI would lower Social Security benefits (relative to currently scheduled benefits) by amounts that grow with each additional year that an individual receives benefits. This could cause hardship among very old people. As a result, a modest benefit increase for people who have received benefits for many years should accompany the switch to the chained CPI. Fiscal commission co-chairs Erskine Bowles and Alan Simpson included this adjustment along with their chained CPI proposal, as did the Bipartisan Policy Center’s Rivlin-Domenici Commission.
- Either exempt Supplemental Security Income (SSI) and veterans’ pensions from the switch or make other changes to mitigate the chained CPI’s impact on the poor beneficiaries of these programs. Over time, the percentage cut in SSI benefits (which go to the nation’s poorest elderly and disabled people) and veterans’ pensions would be substantially larger than the percentage cut in Social Security benefits. Policymakers should either exempt SSI and veterans’ programs from the switch or soften the otherwise-harsh impact on beneficiaries, such as by providing a modest benefit increase in these programs, as well, to people who have received benefits for many years and making a few other needed adjustments in SSI.
- Specify the programs to adopt the chained CPI to avoid confusion or unintended effects. The CPI appears in hundreds of places in federal law, affecting not just annual cost-of-living adjustments (COLAs) but also caps, eligibility thresholds, reporting requirements, fines or penalties, and payment rates for various programs. About a dozen such provisions, however, account for the lion’s share of the potential savings from switching to the chained CPI. To avoid confusion and future litigation, lawmakers should amend specific statutes as appropriate, rather than enacting blanket language.
For more details, see our report.