Opponents of the chained CPI often propose an alternative index for cost-of-living adjustments, the experimental CPI for Americans 62 years of age and older (CPI-E), which BLS has developed as a possible measure of inflation for the elderly subgroup. On Friday, CBO examined the CPI-E in a blog post, showing the goals of developing the CPI-E as well as some of the flaws of the measure.

The growth of health care costs has historically outpaced the rate of inflation, though there has been some slowdown in recent years. Seniors spend a much greater proportion of their income on health care, and the CPI-E weights it more heavily, accounting for about half of the 0.2 percent by which the CPI-E has outpaced the CPI-U since its development.

^{Source: CBO}

Much of the other half of the difference between CPI-E and CPI-U is due to the larger weighting of housing in the CPI-E. The CPI incorporates an "imputed rent" based on the value of housing. However, given as many seniors have paid off their mortgages, the price of housing may play a smaller role in seniors' cost of living than the measure indicates.

CBO further describes some of the issues with the CPI-E:

It is unclear, however, whether the cost of living actually grows at a faster rate for the elderly than for younger people, despite the fact that changes in health care prices play a disproportionate role in their cost of living. Determining the impact of rising health care prices on the cost of someone’s standard of living is problematic because it is difficult to measure the prices that individuals actually pay and to accurately account for changes in the quality of health care...Many analysts think that BLS underestimates the rate of improvement in the quality of health care, and some research suggests that such improvement may make the true increase in the price of health care more than 1 percentage point a year smaller, on average, than the increase in that price measured in the CPI. If that is the case, then all versions of the CPI overstate growth in the cost of living, with the overstatement being especially large for the CPI-E because of the large weight on health care in that index.

Switching to the CPI-E by itself would not address two of the problems of the traditional CPI: subsititution bias and small-sample bias. We've covered substitution bias before on The Bottom Line. If the relative prices of two substitutable goods -- say, apples and oranges -- change, consumers are expected to change their buying habits accordingly. The traditional CPI is only able to adjust when the market basket of goods in the CPI is revised, but the chained CPI takes this substitution bias into account and therefore more accurately measures inflation.

The other major flaw of the traditional CPI, small-sample bias, is often ignored but is also relevant. CBO's recent post examining differences between the traditional index and chained index offers a detailed explanation of how the small sample of items used in the calculation of indexes in specific metropolitan areas can upwardly bias the CPI.

BLS creates the item-area indexes using, on average, prices of only about 10 examples of an item. Such a small sample creates a measurable upward bias in those indexes. Because the traditional CPI is calculated as an arithmetic average of those indexes (and the arithmetic average is unbiased), any bias contained in the item-area indexes carries through to the overall CPI.

...The chained CPI-U is also largely free of small-sample bias because of the way in which it is computed. Both the traditional CPI and the chained CPI-U are based on the same item-area indexes, which are calculated using a geometric average. To combine those indexes into an overall estimate of price growth in the United States, however, BLS uses a geometric-average formula for the chained CPI-U, as opposed to an arithmetic average formula for the traditional CPI. The use of a geometric-average formula to combine the item-area indexes effectively makes the number of elements in the geometric average much larger, which essentially eliminates small-sample bias.

Measuring inflation is a difficult task, but the chained CPI is currently the best index available. The CPI-E was designed to measure inflation specifically for seniors, but it still suffers from some technical flaws, and there is still an open question of whether it makes sense to use this index for Social Security, which contain subgroups other than seniors. A better way to deal with any change in benefits is by providing additional protections along with the change, as was done in the President's budget and the recently released "Bipartisan Path Forward." Benefits can be adjusted and protections can be added, and both are better than continuing to use an inaccurate measure of inflation.

Today, the former co-chairs of the Fiscal Commission, former Senator Alan Simpson (R-WY) and Erksine Bowles, released "A Bipartisan Path Forward to Securing America's Future," their detailed fiscal plan that would replace the abrupt and mindless cuts under sequestration and put debt on a downward path as a share of the economy with an additonal $2.5 trillion in deficit reduction.

Since the Commission's 2010 report, lawmakers have made some progress in getting our fiscal house in order with an estimated $2.7 trillion in enacted savings through continuing resolutions, the Budget Control Act, and the American Taxpayer Relief Act. However, most of the easiest savings have already been enacted, and debt is still far from being on a sustainable path. The new plan is intended to be "Step 3" of the needed deficit reduction effort ("Step 1" involved reducing discretionary spending and limiting the growth of that spending, while "Step 2" enacted modest increases in revenue and minor cuts to spending).

Simpson and Bowles previously laid out a framework for this "Step 3" in late Feburary, but the report released today presents the specific policy options that would achieve the needed deficit reduction. The report also presents a path forward to achieve "Step 4," which would include reforms to ensure the 75-year solvency of Social Security, restore the Transportation Trust Fund, and limit the growth of federal health care spending per capita to the growth of GDP.

Below are the policy changes included in "Step 3," measured from a current policy baseline identical to CRFB realistic.

^{Source: Bipartisan Path Forward}

Under the proposal, debt would fall from 76.4 percent of GDP in 2013 to 69.3 percent of GDP in 2023, compared to 79.0 percent of GDP under our CRFB realistic baseline. Revenues would be 19.7 percent of GDP in 2023 compared to 19.1 percent under the CRFB realistic baseline. Spending under the plan is projected at 21.6 percent of GDP compared to 23 percent under our baseline. If lawmakers took "Step 4" of the plan, debt levels would be even lower.

It's very encouraging to see a bipartisan approach that exceeds CRFB's recommendation for $2.4 trillion in additional deficit reduction. Along with the already released budget proposals, lawmakers could use the "Bipartisan Path Forward" as a guide for replacing sequestration with smart deficit reduction. We will be following up with more analysis of the plan soon.

Click here to read the full report.

A new report by the Bipartisan Policy Center’s (BPC) Health Care Cost Containment Initiative was released today containing roughly $560 billion in savings to federal health spending over the next decade. The report, "A Bipartisan Rx for Patient-Centered Care and System-wide Cost Containment," offers a detailed and integrated plan for reforming federal health programs and bending the health care cost curve.

The majority of the savings – nearly $300 billion – is derived from changes to the Medicare program.  Some of the most significant Medicare reforms include:

New "Medicare Networks." BPC’s plan recommends an approach to reforming Medicare that moves away from Medicare fee-for-service (FFS) with greater beneficiary and provider incentives for higher value service. Under their proposal, Medicare providers and beneficiaries would have three options. Traditional Medicare fee-for-service (FFS) would still exist and a new, reformed version of Accountable Care Organizations (ACOs) called “Medicare Networks” would be created. Medicare Advantage would be the third option and would be reformed to improve competition.

The new Medicare Networks would be comprised of a group of providers working together to deliver care and sharing in any savings or losses. A network would contract with CMS and have a unique spending target. Providers in this model would be paid through a mix of a fixed per beneficiary payment and a fee schedule. Providers would share in savings from improved efficiency and could benefit from other incentives such as payment for services not previously reimbursed by Medicare.

On the beneficiary side, those who enroll in a Medicare Network would receive a $60 annual discount on their Medicare premium for the first three years along with lower cost-sharing for in-network providers. If a network meets quality and savings targets, then beneficiaries in that network would receive 25 percent of the savings in the form of reduced monthly premiums.

Replace the SGR.  BPC recommends repealing the antiquated sustainable growth rate (SGR) formula and replacing it with a new method that provides higher payments for those providers in a Medicare Network and a freeze in payments for those in FFS.

Reform Medicare Advantage. As part of their approach, the plan calls for establishing a new standardized minimum Medicare Advantage (MA) benefit, including an out-of-pocket cap and lower cost-sharing for beneficiaries who choose high-value providers from tiered networks. It would also implement a competitive bidding system for certain MA plans. Some of the savings could be re-directed to reduce premiums and cost sharing for enrollees.

Other MA reforms include changes to the star rating system to lower bonus payments to plans until regional markets convert to the competitive bidding system, at which point the bonus payments would be eliminated.

Bundled Payments. BPC’s plan recommends extending bundled payments into the standard Medicare payment method for post-acute care providers, similar to the President’s proposal, which saves $8 billion over ten years.

Cost-Sharing Reforms. Similar to some of the cost-sharing reforms proposed in other deficit reduction plans, BPC proposes to replace the deductibles for Part A and B with a combined $500 deductible, a cost-sharing limit of $5,315, and new copayments recommended by MedPAC. Additionally, they would reform supplemental coverage (both Medigap plans and employer-provided plans, including Tricare-for-Life and the Federal Employees Health Benefits Program) by requiring that they include a $250 deductible, have an out-of-pocket maximum no lower than $2,500, and cover no more than half of an enrollee’s coinsurance/copayments. While most of these cost-sharing reforms would yield savings, BPC does recommend increasing spending by $75 billion to expand cost-sharing assistance for beneficiaries below 150 percent of poverty.

Raise income-related premiums for wealthier beneficiaries. BPC recommends expanding income-related premiums for Medicare beneficiaries with higher incomes by lowering income thresholds until 17 percent of beneficiaries pay income-related premiums, up from about 5 percent now. This proposal would alone save over $66 billion through 2023.

Graduate Medical Education (GME). BPC’s overall GME proposal is budget neutral. It proposes a reduction in Indirect Medical Education (IME) add-on payments from 5.5 percent to 3.5 percent to better align with actual costs. However, it uses the savings to pay for incentive payments to high-performing institutions and additional residency slots.

Per-beneficiary spending cap. In order to ensure savings in the long term, the authors recommend that no earlier than 2020 policymakers implement a fallback spending limit on annual per-beneficiary spending growth to a target of nominal GDP per-capita growth + 0.5 percentage points (using a five-year rolling average). This would apply differently to fee-for-service, Medicare Networks, and Medicare Advantage, as elaborated on below.

In addition to these reforms, the report includes numerous more recommendations such as expanding competitive bidding to more durable medical equipment (DME) and equalizing payment differences across delivery sites to the rate of the lowest cost setting. Another sizable policy proposed is eliminating copayments for low-income beneficiaries using generic and low-cost drugs, saving $44 billion over the next decade due to the lower cost of generic drugs.

The remaining savings in BPC's proposal come from new revenues from reforms to health-related tax provisions. BPC proposes replacing the tax on high cost health plans (the “Cadillac tax”) from the Affordable Care Act with a limit on the tax exclusion for employer-provided health insurance at the dollar amount equal to the 80th percentile of premiums of such insurance, and indexed to GDP per-capita growth through 2023, and to GDP per-capita growth + 0.5 percent thereafter. This is estimated to raise $262 billion, mostly from the tax on contributions to plans with high premiums, but also from the shift in employee compensation from untaxed health benefits to taxable wages.

The plan also calls for replacing the current health insurance plan tax from the Affordable Care Act with a paid-claims tax on a revenue-neutral basis. The paid-claims tax would apply a tax on health insurance claims, both to commercially insured plans and self-insured. The authors argue this could also help to drive plans toward alternatives to Medicare FFS that are based on a capitated payment model (since those payments would not be based on claims).

As the graph above shows, BPC's plan would help to lower the trajectory of Medicare spending over the course of the next decade.  By 2023, these reforms would lead Medicare spending to be slightly less than one-half of a percentage point of GDP less than they would be under current policy. BPC also estimates that over the next 20 years, their proposal would save Medicare $1.25 trillion. Overall, the recommendations in BPC's report are a great addition to the growing number of options lawmakers can consider as part of a comprehensive effort to address the budget's largest driver of future deficits: rising health care spending. 

Our next blog post in our series analyzing the President's budget will look at where the budget leaves revenue and spending by the end of the decade and the composition of that spending and revenue.

As highlighted in our initial analysis, the budget would put the debt on a downward path to 73 percent of GDP by 2023 through a mix of tax increases and spending cuts. In terms of revenues in the proposal, OMB estimates that they would rise from 16.7 percent of GDP in 2013, to 17.8 percent in 2014, 18.9 percent by 2018 and finally reaching a peak of 20.0 percent by 2023. You can see the policy changes that the President makes on the revenue side here. Meanwhile, spending would fall from 22.7 percent of GDP in 2013 to 21.7 percent in 2023. We've discussed some of the President's spending proposals already, specifically the switch to the chained CPI and the health care changes.

Readers of the blog are likely familiar by now with what revenue, spending, deficits, and debt look like under the President's budget and what policies are used to achieve those numbers. But another important question is how the composition of spending and revenue change over time.

Going forward, increases in revenue are largely driven by increases in individual income taxes. In fact, it entirely accounts for the increase as a percent of GDP from 2014 to 2023, with other factors offsetting each other. This build-up in income tax revenue from 8.1 percent of GDP in 2014 to 10.3 percent in 2023 is due to the economic recovery, some new tax increases, and the tendency for income to grow faster than inflation, thus pushing some taxpayers into higher tax brackets and producing higher revenue. Other categories of revenue are a much smaller factor. Payroll taxes, estate taxes, and other sources of revenue rise slightly as a percent of GDP while corporate income taxes and excise taxes remain constant and revenue from the Federal Reserve falls as quantitative easing winds down. As a percent of total revenue, individual income taxes and estate taxes rise between 2014 and 2023 while every other category of revenue decreases.

^Source: OMB

The spending side largely reflects the story of the federal budget over the next decade and beyond. Interest spending will rise from 1.3 percent of GDP in 2014 to 2.9 percent, largely due to expected increases in interest rates. Social Security spending would rise from 5.1 percent to 5.4 percent (counting the chained CPI savings), while Medicare and Medicaid would increase from 4.9 percent to 5.3 percent. Other spending would decline as a share of GDP. Discretionary spending would fall from 7.3 percent to 4.9 percent, reflecting both the war drawdown and the discretionary spending caps, while other mandatory spending will fall from 3.6 percent to 3.2 percent, in part reflecting the economic recovery. As a share of spending between 2014 and 2023, interest would jump from 5.9 percent of spending to 13.5 percent, while Social Security would rise from 22.7 percent to 24.8 percent. Medicare and Medicaid will take up 24.6 percent of spending in 2023 as opposed to 21.9 percent in 2014. Discretionary spending will fall from one-third of spending to 22.8 percent, the decline being split roughly equally between defense and non-defense (NDD), and other mandatory spending will fall from 16.4 percent to 14.5 percent. 

^{Source: OMB
Note: OMB separates out the chained CPI in its tables. We have attributed it to Social Security for these charts. We have also attributed a placeholder for disaster spending to non-defense discretionary spending, although some portion of it may be mandatory spending.}

In short, the President's budget, at least on spending, largely reflects the trends of the budget that we are seeing: increased spending on health care, Social Security, and interest with relatively less on everything else. That spending will be financed increasingly with revenue from the individual income tax.

Included in the President’s FY 2014 budget proposal is a $400 billion package of health care savings. As we described in our analysis of his budget, these health savings are part of the President’s deficit reduction offer that was also on the table during the fiscal cliff negotiations and offered as replacement to sequestration. Much of the savings comes from reforms that have been introduced in the President’s prior budget proposals and the bulk of them are from reductions in Medicare spending. But this year's budget includes some new additions and changes to previous policies.

• Prescription drug rebates and related reforms ($162 billion): As he did in last year's budget plan, the President proposes requiring rebates for drugs purchased for beneficiaries in the Medicare Part D Low-Income Subsidy (LIS) program. Currently, Medicaid requires drug companies to pay "rebates" equal to at least 23.1 percent of the average manufacturer price (AMP), and more for drugs with rapid cost growth. The President’s budget would make manufacturers of these drugs responsible for the same rebate for drugs provided to Part D LIS beneficiaries, saving the federal government $123.2 billion. The Administration also proposes closing the Part D coverage gap ("donut hole") through rebates for brand name drugs by 2015 instead of 2020 under current law, saving $11.2 billion. Other reforms would prohibit pay-for-delay agreements between brand name and generic pharmaceutical companies that delay entry of generic drugs and biologics into the market and facilitate faster development of generic biologics.
• Post-acute care provider reductions ($94 billion): The President’s budget includes various reforms to post-acute care provider payments. These include reducing market basket updates to Inpatient Rehabilitation Facilities (IRFs), Long Term Care Hospitals, Skilled Nursing Facilities, and home health agencies. It would also implement bundled payments for at least half of the payments to these providers beginning in 2018. To further improve efficiency and savings, the President proposes equalizing payments for certain conditions treated at IRFs and SNFs, reducing payments to SNFs with high rates of preventable readmissions, and reinstating stricter classification rules for IRFs.
• Other provider reductions ($55 billion): The President includes a handful of other reductions to provider payments such as reducing Medicare payments to cover bad debts (unpaid patient cost-sharing), reducing certain rural health provider payments, and better aligning Graduate Medical Education (GME) payments with actual costs. Many of these are based upon recommendations proposed by MedPAC. The budget also includes a few reductions to Medicaid spending, such as limiting Medicaid reimbursement of durable medical equipment based on Medicare rates. However, it does not include some of the larger cost-saving policies from the President’s FY 2013 budget which would have lowered the Medicaid provider tax threshold to reduce state gaming and applied a single blended matching rate to Medicaid and the Children's Health Insurance Program. They have backed off those changes since the Supreme Court's decision on the Affordable Care Act, which allowed states to opt out of the Medicaid expansion without any additional loss of funding.
• Income related premiums ($50 billion): Perhaps one of the most significant changes to a previously proposed policy was to the President’s proposal to increase income-related premiums for certain Medicare beneficiaries. Currently, most Medicare beneficiaries pay 25 percent of Part B (physician’s offices) premiums, while those with incomes over $85,000 ($170,000 for couples) pay between 35 to 80 percent, depending on their income. Last year, the President proposed increasing these income-related premiums by 15 percent, saving roughly $28 billion over ten years. However, this year’s proposal would add more income-related brackets and increase premiums until capping the highest tier at 90 percent for those earning over $196,000. This is slightly more regressive than last year's proposal, increasing premiums more for those between $85,000 and $107,000 than for those above $186,000 -- over a 50 percent increase compared to a 12 percent increase at the top -- but increasing savings to $50 billion as a result.

^{Source: CMS}

• Cost sharing reforms ($14 billion): We recently highlighted the potential cost sharing reforms have for bipartisan compromise. While the President’s budget does not go as far as some of the other cost sharing proposals out there, it does provide $14 billion in savings by applying a $25 increase to the Part B deductible in 2017, 2019, and 2021; introducing a $100 home health copayment for certain episodes; introducing a surcharge on Part B premiums for new beneficiaries who purchase Medigap policies with low cost-sharing requirements; and lowering copayments for generic drugs for lower-income beneficiaries.
• Other changes ($27 billion): The remaining health savings come from adjustments to Medicare Advantage payments and reforms to the Federal Employees Health Benefit Program (FEHBP). The largest of these reforms would be a gradual increase to the minimum coding intensity adjustments to Medicare Advantage plans, which reflects differences in coding practices between Medicare and Medicare advantage ($15.3 billion). A new policy that has gained some attention is a change that would allow FEHBP to offer a Self+One option to domestic partners, which OMB estimates would save over $5 billion.

All in all, the President deserves credit for making a concerted effort to reduce health spending. However, his proposal falls short of addressing one of the major long-term drivers of health care spending over the next few decades: population aging. More can be done to bend the health care cost curve with reforms that target our aging population and lower excess health care cost growth. It appears some consensus is emerging on such health care reforms. Meanwhile, the President’s proposal adds to the options on the table that should be considered in a comprehensive plan to put health spending on a more sustainable path.

For the first time in a few days, Tax Day did actually fall on April 15, so hopefully the tax procrastinators out there were able to get their filing done. Filing your taxes provides a good reminder of how complicated the current code is. With the President's budget coming out, we'll take a look at how it would change the tax code.

Under the budget released last week, revenues are projected to rise from 16.7 percent of GDP in 2013 and 17.8 percent in 2014 to 18.9 percent in 2018 and 20 percent by 2023. Much of this increase is already assumed under the Administration’s baseline, due to a recovering economy, tax increases included in the Affordable Care Act and the revenue increases that were part of the American Taxpayer Relief Act, which together account for the rise of revenues to 19.4 percent of GDP by 2023. An additional 0.6 percentage points in 2023 comes from the net revenue increases proposed in the President’s budget.

^{Source: OMB, CBO}

As we mentioned before, the budget is split out into two separate sections. The first section reflects the latest White House offer made during the fiscal cliff negotiations, and the budget lays out two revenue provisions, both pretty familiar ones, to hit the desired target. The first is a proposal to limit the amount of deductions and exclusions that earners in the top three tax brackets can reduce their tax liability, limiting to 28 percent of the value of those preferences. The Administration would also institute the so-called “Buffett Rule” requiring that millionaires pay no less than 30 percent of their income (after charitable contributions) in taxes. The Administration estimates that these two measures would combine to raise $583 billion over the next ten years. Adding in the revenue portion of the chained CPI, which is part of the offer, raises the total to $683 billion.

Outside of the offer, the budget includes a number of provisions that have appeared in past budgets. In terms of tax cuts, the budget extends the 2009 refundable credit expansions ($161 billion), expands the child and dependent care credit ($9 billion), and enacts a temporary tax credit for employers who add to their payroll ($25 billion), among a few other things. Tax increases include setting the estate tax back to 2009 parameters ($72 billion), enacting a fee on large banks ($59 billion), and taxing carried interest as ordinary income ($16 billion).

^{Source: OMB
Note: Some revenue estimates may include effects on outlays. Conversely, some policies with revenue effects that OMB lists as spending provisions are not included.
*By itself, the Buffett Rule would raise $99 billion. Due to interaction with the 28 percent limit, it only raises $53 billion.}

One departure from last year's budget is that many business-related provisions, both tax cuts and tax increases, are thrown into a deficit-neutral reserve fund for business tax reform. Some of the tax cuts include extensions of the R&E credit, renewable energy credits, and a number of small business preferences. The tax increases include changes to the international tax system, the elimination of fossil fuel preferences, financial product reforms, and repeal of the last-in first-out (LIFO) inventory accounting method. Overall, these changes raise net revenue of $145 billion over ten years, which would be used to offset the cost of rate reductions or other revenue-decreasing policies.

Tax reform, and tax expenditure reductions in particular, may be the key to a debt deal. The President's budget has laid out many ideas that will contribute to the debate.

Click here to see the other blogs we have done on the President's budget.

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.

Fiscal Commission co-chair Erskine Bowles will be addressing the Associated Press at their annual meeting in Orlando today. The event is co-hosted by the Newspaper Association of America. The meeting will be livestreamed starting at 10:30 AM Eastern time, and Bowles is scheduled to speak at 12:30 PM Eastern time.

You can watch the live stream of the video below.

Last week, the Government Accountability Office (GAO) released its long-term fiscal outlook, presenting both long-term projections and estimates of the fiscal gap. Since the last longer-term projections from CBO came out in June, the report provides a good measure of what the budget looks like after the American Taxpayer Relief Act and the challenge we face going forward.

GAO presents two simulations: a baseline extended scenario similar to CBO's current law and an alternative simulation similar to CBO's AFS with a few differences, particularly on health. The baseline extended projection incorporates all of assumptions of CBO's current law on revenue and spending, except that it uses the Medicare Trustee's projections that assumes the Affordable Care Act will reduce health care excess cost growth (growth in excess of GDP growth) to an annual rate of 0.2 percent. The alternative simulation assumes that expiring tax provisions are extended and revenues return to their historical average of 17.9 after 2023, the sequestration is waived, discretionary spending gradually returns to its historical average of 7.5 percent, and health care spending follows CMS's alternative scenario that prevents the reductions in payments to doctors due to the SGR and assumes cost-restraint provisions in the ACA have limited effect.

Debt would rise to over 120 percent of GDP by 2030 under GAO's alternative projection and rise to 90 percent of GDP under the extended baseline. While debt shortly stabilizes at the end of this decade, the rapid aging of the population in the 2020's will put debt on a steep upward path.

Long-term debt projections convey the severity of the problem but do not neccesarily give an indication of the size of the necessary solution. In this light, GAO also estimates the federal government's "fiscal gap" or the present value difference between primary revenues and spending over a certain time period. GAO estimates a fiscal gap of 3.9 percent of GDP under its baseline scenario and 8.0 percent under its alternative projection. The table below shows by what percentage revenues would have to increase or spending would have to decrease in order to close the fiscal gap. As can be clear seen in the table, the needed changes become much larger the longer policymakers wait.

^{Source: GAO}

Often, the discussion is wrapped in ten-year projections because that is the window CBO uses for its budget outlook and its scores of legislation. But the debt is a much greater issue in the long term, and policies that address entitlement and tax reform that could have a greater effect beyond this next decade should be the focus.

Click here to read the full report.