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Editorial: Measuring Inflation; Simple Tweak Could Save Billions

President Obama and Congress have hard choices to make as they try to fashion a long-term budget compromise. But not all of the options are excruciating. One measure would generate large savings over the next decade, split between entitlement spending and revenue increases. The pain it inflicts on beneficiaries and taxpayers would be minimal, widely shared and phased in gradually. And all it would require is a quick administrative tweak.

We refer to the long-standing need for more accurate cost-of-living adjustments to federal benefits and income taxes. Current law indexes Social Security and other federal retirement payments to one estimate of consumer prices; it indexes tax brackets, personal exemptions and the like to another. Both slightly overstate inflation, because they do not allow for the fact that consumers offset price increases in certain goods by switching to cheaper alternatives.

Economists have developed a more realistic measure of inflation, known for obscure reasons as the “chained CPI” (consumer price index), which has averaged a little under 0.3 percentage points less per year than existing measures. That difference doesn’t sound like much, but cost-of-living adjustments work like compound interest: This year’s increase in benefits pyramids on top of all the others that have gone before; ditto for tax adjustments.

Using the chained CPI would tame the compounding beast. Applied to Social Security and civil service pensions, as well as other spending, the new, more accurate inflation estimate would save $168 billion over 10 years, according to a paper published last year by The Moment of Truth Project, which is headed by the co-chairs of the president’s bipartisan commission on fiscal reform, Alan Simpson and Erskine Bowles.

The chained CPI would raise another $87 billion in revenue. Add $44 billion in obviated interest on the debt, and you’re at a 10-year savings of $299 billion. That’s 7.5 percent of the oft-cited goal of $4 trillion in savings — all without depriving anyone of money they’re legitimately entitled to.

That’s not the way certain critics of the chained CPI see it, of course. AARP, the seniors’ lobby, decries a $112 billion hit to Social Security over 10 years. AARP has a point — reducing cost-of-living adjustments (COLAs) could hurt those who face rising out-of-pocket medical costs.

But remember: Adjusting those annual increments merely reduces the rate of growth in seniors’ benefits; it does not actually cut them. The immediate impact is negligible — just $1 billion in the first year. That gives future retirees time to adjust. Extremely poor and disabled recipients of Supplemental Security Income could and should be protected.

For others, though, “switching to the chained CPI offers a rare opportunity to achieve deficit reduction on both sides of the budget in a manner that economic analysis supports,” as a recent report by the liberal Center on Budget and Policy Priorities put it. This is why the chained CPI was reportedly one of the few points of bipartisan agreement in last year’s failed budget talks and should be part of any successful negotiations now.

The Washington Post