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To Reduce Deficits, "Chain Link" Both Benefits and Taxes

February 22, 2012 at 4:31 PM

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:

  • Apply the change to both benefit programs and the tax code, and use the proceeds from applying the chained CPI to the tax code entirely for deficit reduction. Using the proceeds to finance a reduction in tax rates should not be acceptable.
  • Give long-time Social Security beneficiaries a modest benefit increase (“bump”). Switching to the chained CPI would lower Social Security benefits (relative to currently scheduled benefits) by amounts that compound each year that the recipient remains on the rolls.  That could lead to hardship among very old people.  Therefore, a modest increase for people who have received benefits for many years should accompany the switch to the chained CPI.  Both the Bowles-Simpson and Rivlin-Domenici deficit-reduction plans include such a bump along with their proposal to adopt the chained CPI.
  • Exempt Supplemental Security Income (SSI) or make other changes to SSI to mitigate the chained CPI’s impact. Applying the chained CPI to SSI, which serves very poor elderly and disabled people and still leaves them well below the poverty line, raises particular problems.  Policymakers should exempt SSI from the switch or soften the impact on SSI beneficiaries.
  • Specify which programs would adopt the chained CPI. The CPI appears in hundreds of places in the U.S. Code and other laws, but only about a dozen such provisions account for the bulk of the potential savings from switching to the chained CPI.  Lawmakers should amend specific statutes to specify the chained CPI, rather than enacting blanket language, and they should focus on areas with significant budgetary effects — essentially annual cost-of-living adjustments in retirement and related benefit programs and annual inflation adjustments in the tax code.

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.


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