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Why ‘chained CPI’ works for Social Security [Blowback]

Erskine Bowles, left, and former U.S. Sen. Alan Simpson of Wyoming chaired a bipartisan deficit reduction commission that supported switching to "chained CPI" to index Social Security payments for inflation.
(Alex Brandon / Associated Press)
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In his March 22 blog post criticizing proposals to switch from the consumer price index to “chained CPI” to determine cost-of-living adjustments for Social Security beneficiaries and other items in the federal budget, Michael Hiltzik claimed that there were “no grounds” for the statement made in a recent paper from the Moment of Truth Project (“Measuring Up, The Case for Chained CPI”) that the chained CPI provides a more accurate measure of inflation than the measure currently used.

In fact, experts across the ideological spectrum agree that the chained CPI is indeed more accurate. In his 2005 book “The Plot Against Social Security,” Hiltzik listed various proposals for reforming Social Security, among them chained CPI. He wrote, “Many economists maintain that CPI consistently overstates inflation ... because it doesn’t account for so-called substitution effects.” Hiltzik doesn’t explicitly endorse the proposal, but this is certainly a far cry from his objection that there are “no grounds” for the claim that chained CPI is a more accurate measure of inflation.

Advocates for using chained CPI to more accurately index government programs to inflation include Austan Goolsbee, who served as chairman of the president’s Council of Economic Advisors under President Obama, and Michael Boskin, who held the same position under the President George H.W. Bush. Their view is shared by the overwhelming majority of economists. A report by the nonpartisan Congressional Budget Office stated that the chained CPI “provides an unbiased estimate of changes in the cost of living from one month to the next.” Two of the most respected and prominent defenders of Social Security, the late Sen. Daniel Patrick Moynihan (D-N.Y.) and the late Robert Ball, the longest-serving Social Security commissioner, who founded the National Academy of Social Insurance, both supported the use of chained CPI to more accurately achieve the goal of providing inflation protection for seniors and disabled beneficiaries.

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The Bureau of Labor Statistics has noted the shortcomings of the current inflation indexing and specifically designed the chained CPI to be a closer approximation to a cost-of-living index. The bureau has developed and refined the chained CPI over more than a decade.

The government indexes benefit programs such as Social Security as well as provisions in the tax code to ensure they keep pace with inflation. Using a more accurate measure of inflation is not a benefit cut, but rather ensures that the benefits increase by the proper amount to achieve the desired policy goal. This change does not single out Social Security, as Hiltzik implies, but would apply to provisions throughout the federal budget. Social Security accounts for slightly more than one-third of the $390 billion in total savings over the next decade that would result from switching to chained CPI, with a similar amount of savings from revenue and the remainder from other government programs indexed to inflation along with interest savings.

To the extent that the overpayments under the current formula provide important help to certain low-income and elderly individuals, a switch to the chained CPI can and should be accompanied by targeted policy changes providing benefit enhancements designed to help the affected populations rather than providing higher-than-justified inflation adjustments for everyone. Every significant bipartisan deficit reduction effort, including the Simpson-Bowles plan, the Domenici-Rivlin plan and the negotiations between Obama and House Speaker John Boehner (R-Ohio) has proposed using chained CPI to index spending programs and the tax code, with a portion of the savings used to provide enhancements for low-income, elderly and other vulnerable populations.

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Addressing our fiscal challenges will require many tough choices and policy changes, but the chained CPI represents neither. Eliminating the unjustified increases in spending and reductions in revenue that have resulted from using an inaccurate measure of inflation should be at the top of the list for any deficit reduction plan.

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Ed Lorenzen, a senior policy adviser at the Committee for a Responsible Federal Budget, is the executive director of the Moment of Truth Project.

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