Committee for a Responsible Federal Budget

Marc Goldwein and Ed Lorenzen: Measuring Inflation Right is Both Fair and Accurate

Apr 30, 2013 | Social Security

In the past, the Bureau of Labor Statistics has made adjustments to the Consumer Price Index without much controversy. But due to the method of calculating the chained CPI, switching to this more accurate measure of inflation requires the creation of a new index, and thus action from Congress. While receiving the support of many economists, the chained CPI has been attack by interest groups on the left and right.

Last week, Robert Romasco, the President of the AARP, argued that chained CPI was both "unfair and inaccurate," focusing on how the provisions would affect retirement benefits. On the other end of the spectrum is the American for Tax Reform, who opposed the chained CPI as a tax increase. But Committee for a Responsible Budget's Marc Goldwein and Ed Lorenzen argue in The Hill there is nothing unfair or inaccurate about the chained CPI. It is a more accurate measure of inflation, with the secondary benefit of helping to reduce our budget deficit. They write:

Economists from the left, right, and center are in broad agreement that chained CPI more accurately reflects cost-of-living increases by accounting for the small-sample and substitution biases in the current inflation measure. This view is shared by experts at the non-partisan Congressional Budget Office as well as the experts at Bureau of Labor Statistics who are responsible for measuring inflation. Adopting the chained CPI doesn’t represent a policy change, but rather would best reflect the current intent of the law to index various provisions to inflation.

And while some argue that seniors face faster cost-growth than other populations, there is little evidence of a significant difference when one accounts for the fact that seniors are more likely to own their own homes mortgage free, have different shopping habits than younger populations, are able to take advantage of senior discounts, and receive constantly improving health treatments. Indeed, according to the Congressional Budget Office, “it is unclear, however, whether the cost of living actually grows at a faster rate for the elderly than for younger people.”

Moreover, offering seniors a preferential inflation measure raises more fairness concerns than it answers. If seniors receive a higher inflation measure, should non-seniors on the Social Security program receive a lower measure? Geographic inflation disparities are far larger than alleged age disparities (inflation has averaged 2.7 percent in New York and 1.8 percent in Detroit over the last decade); why protect seniors and not New Yorkers? What about other government programs and tax provisions? Should each be indexed to costs within its population? Or only those backed by powerful interest groups?

More unfair would be ignoring our fiscal and retirement challenges and leaving the job to a future politicians. According to the left-leaning Center on Budget and Policy Priorities, the President’s chained CPI proposal would result in benefit levels 1 to 2 percentage points lower than under current law – and it accompanies the switch with benefit enhancements for the old that actually reduce poverty among that group. By comparison, there is a 25 percent cut scheduled to occur under current law when the trust funds dry up in 2033. The greatest unfairness would be allowing this across-the-board benefit cut to hit every beneficiary regardless of age or income – when this cut could be easily avoided through a balanced package of revenue and benefit adjustments.

In the original Fiscal Commission plan, the chained CPI was included as part of a comprehensive Social Security reform. There is no doubt including chained CPI along with other policies to make Social Security solvent would be the preferred approach, and recently released "Bipartisan Path Forward" included an additional step to strengthen Social Security. But the failure of the political system to address this program is no reason to continue using an inaccurate measure of inflation. Argue Goldwein and Lorenzen:

Mr. Romasco is right, we need a national conversation on improving retirement security, including how to make Social Security sustainably solvent in order to avoid abrupt benefit cuts and ensure the system is better protecting those who rely on it. Ideally, we’d have this conversation now. However, the overheated reaction to a technical correction in cost of living adjustments suggests that the political system may not be ready to tackle comprehensive Social Security reform. Continuing to index benefits improperly while we wait for this reform to materialize would be a costly mistake that will only make future Social Security changes more painful.

Click here to read the full op-ed.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.