Policymakers can gradually trim the growth of benefit programs and boost future tax revenues by using the “chained” Consumer Price Index (CPI), rather than the official CPI, to adjust various federal benefits and provisions of the tax code to account for inflation, our new report explains.
Many economists believe that the official CPI overstates inflation and view the chained index as a better measure. Switching to the chained CPI would be a sound component of a comprehensive package to put the budget on a sustainable course— if policymakers also make these adjustments:
Switching to the chained CPI in mid-decade — after the economy is healthier — would trim deficits over the next ten years by roughly $100 billion to $150 billion, even with the benefit improvements that we recommend. Savings would grow substantially in subsequent decades. And adopting the chained CPI (along with a benefit “bump” for long-term beneficiaries) would close nearly one-fifth of Social Security’s shortfall over the next 75 years.
Several recent deficit-reduction packages have called for adopting the chained CPI, including the Bowles-Simpson plan, the Domenici-Rivlin recommendations, and the Senate’s “Gang of Six.” We haven’t endorsed all elements of those packages and, in fact, we’ve criticized them vigorously where we disagreed. But the chained CPI is one element that we can support.