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Pros and Cons on the Chained CPI


In a new commentary, CBPP President Robert Greenstein examines the arguments for and against adopting the “chained” Consumer Price Index for calculating annual cost-of-living adjustments in Social Security and other benefits and annual inflation adjustments in the tax code.  Here’s the opening:

The news that President Obama’s new budget will propose adopting the “chained” Consumer Price Index (CPI) for cost-of-living adjustments in Social Security and other retirement programs, and annual inflation adjustments in the tax code, has intensified the debate on this issue.  Some commentators portray this proposal as a test of fiscal rectitude, arguing that the chained CPI more accurately measures inflation — period — and that if you’re opposed to it, you aren’t really serious about addressing deficits.  Others, including many progressives, strongly reject the proposal, believing it would impose serious hardship on seniors with modest incomes.

I’m not comfortable with either position.

There are legitimate reasons not to adopt the chained CPI, and many people who aren’t affluent would indeed be worse off.  At the same time, fears that the chained CPI would impose severe hardship are overblown, especially if policymakers accompany it with a robust package of protections and mitigating measures for those who are very old or have low incomes.

Of particular importance in my view is whether policymakers adopt the chained CPI by itself or as part of a larger, balanced deficit-reduction package that stabilizes the debt as a share of the economy over the coming decade.  If the former occurs, I think the case against the chained CPI outweighs the case for it.  The chained CPI should be considered only as part of a larger overall deficit-reduction package that is well balanced.

Click here for the full commentary.