Committee for a Responsible Federal Budget

Bipartisan Support for the Chained CPI

Jul 13, 2011 | Social Security

Talk of switching to the chained CPI for all inflation indexed elements of the federal budget has continued gaining much attention in the past few months, and the policy has been included in the ongoing debt ceiling negotiations (we'd like to think our policy paper had something to do with it). Predictably, it has come under attack from both the right and the left for raising taxes and affecting Social Security benefits, respectively. But people from across the political spectrum have also come to its defense.

On the right, Charles Blahous, a Social Security trustee, has defended the chained CPI as a justified technical change to keep with the government's goal of using a correct measure of inflation to adjust programs and provisions of the tax code.

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.

On the left, Chuck Marr of the Center on Budget and Policy Priorities echoed our clarification of the distributional analysis of the tax impact of the chained CPI, in response to a Joint Committee on Taxation estimate. We argued that the JCT estimate both excluded the effects of AMT patches from the analysis and did not account for low-income people who do not file tax returns. Also, they used percent change in taxes paid, rather than the more commonly used percent change in after-tax income to measure the distribution. Here is Marr's take: 

The Tax Policy Center, which does not face the same current-law requirement, has conducted a parallel analysis that gives a more realistic assessment of how switching to the chained CPI would affect different income groups.  The results show that the percentage reduction in after-tax income — the best way of measuring the progressivity or regressivity of a tax policy change — is modest and nearly identical in all income brackets.

Many other individuals and groups have supported/defended the chained CPI: Donald Marron, the Washington Post editorial board, Reihan Salam, the Progressive Policy Institute, the Heritage Foundation, and Jared Bernstein. Also, the Center for American Progress included it in their Peterson Foundation fiscal plan.

As our policy paper on the chained CPI said:

Addressing our fiscal challenges will require many tough choices and policy changes - but switching to the chained CPI represents neither. Such a change offers policymakers the rare opportunity to achieve significant savings spread across the entire budget by making a technical improvement to existing policies. As such, across-the-board adoption of the chained CPI should be at the top of the list for any deficit reduction plan or down payment.