Federal Reserve Chairman Alan Greenspan called Monday for a blue-ribbon commission to adjust spending and tax programs for inflation, a move that probably would mean lower Social Security benefit increases and higher taxes.
Lawmakers, hunting for ways to cut the deficit, refrained from quickly dismissing the idea.
Greenspan and other experts said the consumer price index, used to index federal pensions and tax brackets for inflation, has an upward bias--although the Fed chief said the CPI is basically sound, and he endorsed the agency producing it.
Greenspan again told lawmakers Uncle Sam could save $150 billion over five years by using a price gauge that is one percentage point less a year than the existing CPI.
"I believe the evidence suggests that some adjustment to our indexing procedures is warranted," Greenspan told the Senate Finance Committee, saying any miscalculation produces an "inadvertent distribution of wealth one way or the other."
He urged lawmakers to consider an independent commission that could sift through available price data to take account of the difference "between these measures and the concept of a true measure of the cost of living."
Greenspan opened a political can of worms in January by saying the CPI overstates inflation by 0.5 to 1.5 percentage points a year and that the government could save billions of dollars by using a more accurate gauge for indexing.
House Speaker Newt Gingrich (R-Ga.) and other Republicans embraced the idea and put pressure on the Bureau of Labor Statistics to improve the CPI as quickly as possible.
But Democrats have accused Republicans of trying to "cook the books" to cut Social Security and raise taxes.
The government uses the CPI to keep Social Security and federal pension payments in step with inflation. It also uses the CPI to adjust income-tax brackets and standard deductions. A less rapid rise in the value of deductions, for example, would mean individuals and families would pay higher taxes.
Greenspan noted that about 30% of government spending is indexed to the CPI.
"The fundamental problem is that we have legislated a mechanical procedure to implement cost-of-living adjustments where--given the problems inherent in any statistical measure of aggregate prices--there is a need for the application of sound judgment," Greenspan said.
He said an independent panel of experts also could help improve the available statistics through a review process.
He also urged "careful consideration" of a special cost-of-living adjustment for retirement benefits to reflect the buying patterns of the elderly population.
"What these people are talking about . . . probably has a greater effect on our budget then anything else this committee may do this year," Sen. Bob Packwood said of the panel of experts testifying before the Finance Committee. The Oregon Republican chairs the panel.