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Chained CPI Makes Sense Only Under Certain Conditions

February 20, 2014 at 3:04 PM
Paul N. Van de Water

We’ve long said that the chained Consumer Price Index (CPI) for cost-of-living adjustments in Social Security and other retirement programs could be a reasonable part of a comprehensive deficit-reduction package — but only under certain conditions.  In the absence of those conditions, the President’s decision not to include the chained CPI in his fiscal year 2015 budget is a sound one.

Many economists believe the official CPI overstates inflation and view the chained CPI as a more accurate measure of overall inflation (although not of inflation faced by the elderly).  On average, the chained CPI grows about 0.25 to 0.3 percentage points more slowly than the official CPI.

Using the chained CPI to index Social Security and other programs would mean that benefits would be a bit lower than under current law.  The proposal in the President’s fiscal year 2014 budget would have reduced benefits for future Social Security beneficiaries by an average of 1 to 2 percent over the course of their retirement.

Since Social Security benefits are modest, and since most beneficiaries have little other income, no one should propose a cut in benefits casually.  We’ve said time and again that the chained CPI is worth considering only if two crucial conditions are met:

  • First, measures to protect the very old and low-income people must be an essential part of the chained CPI; the Administration included these features in last year’s proposal.
  • Second, even with such protections, the chained CPI must be part of a larger budget package that shrinks long-term deficits significantly and does so in a fair and balanced manner by including measures that raise significant revenue in a progressive manner.

This second condition remains well out of reach.  That’s why CBPP President Robert Greenstein stated when the President’s budget was released last year, “Politically speaking, I had thought the White House should not put these concessions [including the chained CPI] in the budget, as distinguished from offering them in negotiations if and when Republicans agreed to dedicate substantial savings from curbing tax credits, deductions, and other preferences (known as ‘tax expenditures’) to deficit reduction.”

Greenstein also predicted, “I am concerned that Republican leaders will adopt the cynical approach of labeling the chained CPI an ‘Obama proposal’ they are willing to accept but only as part of a package that raises little or no revenue and, thus, does not force them to make any sizeable compromises of their own.”  Such an approach would fail to share sacrifices in an equitable manner.

Since that’s exactly what has happened, removing the chained CPI proposal from the budget — while remaining willing to consider it in the context of broader budget negotiations — is an appropriate response.