Three Voices in Support of the Chained CPI

Apr 15, 2013 | Social Security

Given the chained CPI is primary a technical adjustment to more accurately measure inflation, support for the change can be found among experts across the political spectrum. Last week and over the weekend, Charles Blahous of the Mercatus Center, Len Burman of the Tax Policy Center and Syracuse University, and David Brown of Third Way all took a look at the case for moving to the chained CPI.

Much of the attention on the chained CPI since President Obama proposed it in his FY 2014 budget has been focused on how it would affect benefits and taxes. But the main reason for the switch among many economists is its superiority as a measure of price inflation compared to other available indices. Social Security and Medicare Trustee and Mercatus Center senior research fellow Charles Blahous writes in a commentary and a brief summary that the chained CPI should not be thought of as Social Security reform, but rather as a methodological change. Blahous argues that the switch is nothing more than an attempt to keep with current law and measure inflation as accurately as possible:

C-CPI-U is the most accurate available estimate of economy-wide inflation. Some federal policies (like the fixed income thresholds for the recently-enacted 0.9% Medicare surtax) aren’t indexed at all. Others (like Social Security’s benefit formula) are indexed to wage growth. But currently expressed policy in many other areas of the federal budget is to index for general price inflation, no more and no less. To use the best available measure of such inflation is therefore not a "benefit cut" or a "tax increase" as much as it is the most faithful available method of complying with the policy basis of various statutes.

CPI-U and CPI-W weren’t originally inserted into existing laws because their sponsors thought that they overstated inflation; they were inserted because the sponsors were attempting to capture inflation, and those metrics were the best available at the time. To now use the more recently-developed C-CPI-U is in effect to better conform these various aspects of federal law to Congressional policy intent.

The purpose of CPI-indexation is not to attain targeted benefit or tax levels. Many on the left oppose using C-CPI-U because the continued use of CPI-W would lead to higher Social Security benefits, especially among the oldest seniors. Many on the right are similarly concerned about chained C-CPI-U because continuing to use current CPI-U would constrain the growth of federal revenue collections, relatively speaking. I share the policy goals of keeping tax burdens manageable and of ensuring adequate benefits for the most vulnerable seniors. But continuing to overstate inflation is not the appropriate means of achieving these goals -- even with respect to these respective policy advocates’ interests.

Others have proposed alternative indices for Social Security beneficiaries, like the CPI-E, to account for the spending habits of the elderly. But as Blahous argues, Social Security beneficiaries are not just the old, and it does not make sense to estimate inflation for every single demographic.

Even if the CPI-E didn’t suffer from significant methodological shortcomings, however, it could not sensibly be applied to Social Security benefits. Social Security beneficiaries come in various forms, from retirees to the disabled to child survivors. It would make no methodological sense to use a purchasing index for the elderly to adjust benefits for child survivors; nor would it make sense for the young disabled. It would also create a nightmare of complexity to have different beneficiary populations using different measures of CPI, shifting between them as they move from one category to the other (e.g., from disabled to old-age benefits). The purpose of inflation indexation is not to model the purchasing patterns of every individual or subgroup, but to model general price inflation, which C-CPI-U does better (even for Social Security’s beneficiary population, on average) than CPI-E.

Along the same line, David Brown of Third Way has produced a useful report, "The Context and the Case for Chained CPI," explaining the proposed change and the history behind CPI adjustments. Third Way presents a few examples to show that adjustments to the CPIs are not new: the Bureau of Labor Statistics (BLS) redesigned the CPI housing's survey in 1987 and switched to a new formula to incorporate simple substitutions for the traditional CPIs as recently as 1999. The chained CPI is a product of the recommendations made by the Boskin Commission in the mid-1990s. Most methodological changes can be made at BLS's discretion, but what makes chained CPI more accurate also requires the creation of a new index and an act of Congress. Brown explains:

The reason legislation is needed stems from the fact that “chaining”—the method unique to Chained CPI — depends on data that comes with a timelag. A chained index must first compute a month’s inflation estimate with provisional data. That estimate is then subject to revision for up to two years. Some uses of the CPI depend on immediate and final month-to-month data. Simply “chaining” the CPI-U or CPI-W would pose a problem for those uses. So BLS decided that chain-weighting must exist in a completely separate index, published alongside CPI-U and CPI-W. The new index accounts for upper-level substitution bias and offers the benefit of greater accuracy, for those uses which do not depend on immediate, month-to-month data. The fact that Chained CPI is a new index, rather than a new formula for an existing index, is why legislation is needed.

The chained CPI may be more visible than other adjustments to more accurately measure inflation, but it doesn't differ in its goal. Some have argued that Social Security should be completely off the table in the deficit reduction debate, even for relatively modest changes like the chained CPI. But as Len Burman explained in an op-ed in Forbes last week, that approach is short-sighted. Taking different parts of the budget off the table will only force more drastic changes elsewhere. The problem is just too large to reasonably expect to be solved by focusing on small parts of the budget. In order to reduce the deficit in a smart way, lawmakers need to be open to all possible solutions.

Click here for the Moment of Truth's report on the chained CPI and click here for our chained CPI resource page.