MY VIEW: Ed Lorenzen April 2013
Today, Moment of Truth Project Director Ed Lorenzen published an op-ed responding to a recent piece from Michael Hiltzik of the Los Angeles Times which criticized the rationale of switching to an alternative measure of inflation, the chained Consumer Price Index (CPI).
Lorenzen first takes on a claim from Hiltzik that there are "no grounds" for asserting that the chained CPI is a more accurate measure of inflation than the current standard. However, there are many economists and institutions that have supported chained CPI over the current measure CPI-U for this reason:
In fact, experts across the ideological spectrum agree that the chained CPI is indeed more accurate. In his 2005 book "The Plot Against Social Security," Hiltzik listed various proposals for reforming Social Security, among them chained CPI. He wrote, "Many economists maintain that CPI consistently overstates inflation ... because it doesn't account for so-called substitution effects." Hiltzik doesn't explicitly endorse the proposal, but this is certainly a far cry from his objection that there are "no grounds" for the claim that chained CPI is a more accurate measure of inflation.
Advocates for using chained CPI to more accurately index government programs to inflation include Austan Goolsbee, who served as chairman of the president's Council of Economic Advisors under President Obama, and Michael Boskin, who held the same position under the President George H.W. Bush. Their view is shared by the overwhelming majority of economists. A report by the nonpartisan Congressional Budget Office stated that the chained CPI "provides an unbiased estimate of changes in the cost of living from one month to the next." Two of the most respected and prominent defenders of Social Security, the late Sen. Daniel Patrick Moynihan (D-N.Y.) and the late Robert Ball, the longest-serving Social Security commissioner, who founded the National Academy of Social Insurance, both supported the use of chained CPI to more accurately achieve the goal of providing inflation protection for seniors and disabled beneficiaries.
The Bureau of Labor Statistics has noted the shortcomings of the current inflation indexing and specifically designed the chained CPI to be a closer approximation to a cost-of-living index. The bureau has developed and refined the chained CPI over more than a decade.
Lorenzen also notes that that the post only focuses on applying the index to Social Security, while using the chained CPI would affect features of the tax code indexed to inflation and other spending programs as well. The chained-CPI does not have to be implemented in isolation either, many bipartisan proposals have included it along protections for vulnerable populations:
The government indexes benefit programs such as Social Security as well as provisions in the tax code to ensure they keep pace with inflation. Using a more accurate measure of inflation is not a benefit cut, but rather ensures that the benefits increase by the proper amount to achieve the desired policy goal. This change does not single out Social Security, as Hiltzik implies, but would apply to provisions throughout the federal budget. Social Security accounts for slightly more than one-third of the $390 billion in total savings over the next decade that would result from switching to chained CPI, with a similar amount of savings from revenue and the remainder from other government programs indexed to inflation along with interest savings.
To the extent that the overpayments under the current formula provide important help to certain low-income and elderly individuals, a switch to the chained CPI can and should be accompanied by targeted policy changes providing benefit enhancements designed to help the affected populations rather than providing higher-than-justified inflation adjustments for everyone. Every significant bipartisan deficit reduction effort, including the Simpson-Bowles plan, the Domenici-Rivlin plan and the negotiations between Obama and House Speaker John Boehner (R-Ohio) has proposed using chained CPI to index spending programs and the tax code, with a portion of the savings used to provide enhancements for low-income, elderly and other vulnerable populations.
Switching to the chained CPI makes sense for many reasons, which the Moment of Truth Project covers in full detail in its report, Measuring Up: The Case for the Chained CPI. Both putting debt on a sustainable path and making Social Security solvent will require tough choices, but chained CPI is one of the more straightforward.
Click here to read the full response.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.