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Change in inflation measure would affect federal retirees

RetirementMarket and ExchangeInflation and Deflation

The next big battle for federal workers might not be over another government shutdown, but how to measure inflation.

The long-term budget deal that lawmakers agreed last month to pursue is expected to include discussion on whether the federal government should switch from the Consumer Price Index, its current means of tracking rising costs, to the so-called chained CPI.

Chained CPI measures inflation at a slightly lower rate. Adopting that method would bring in more revenue, because tax brackets and many deductions are adjusted annually for inflation.

But it would also reduce the annual cost-of-living adjustments for Social Security and the pensions of federal and military retirees — some of whom are objecting to the prospect.

"The chained CPI is a disingenuous way [for the government] to renege on its promise and its obligations," retiree Guy Miller said.

The 56-year-old Scaggsville man, who retired as a patent attorney last year after 34 years of federal service, calculated his losses under chained CPI at more than $150,000 over 25 years.

Economists and deficit hawks have long argued that the current CPI — which measures changes in the price of a basket of goods and services — overstates inflation. They say it doesn't take into account the substitutions that consumers make when prices jump — such as buying chicken when the cost of steak rises.

Chained CPI captures those behavioral changes. The result, according to the nonpartisan Congressional Budget Office, is that annual inflation measured by chained CPI is on average 0.3 percent lower than the rate captured by traditional CPI.

"It's a more accurate measure of inflation," said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget.

In a report he co-wrote this year, Goldwein estimated that switching to chained CPI would save the government $390 billion over a decade, including $127 billion from Social Security and $38 billion from other federal retirement programs.

"There is no reason we should be overstating inflation when we pay our Social Security benefits and when we do our tax brackets," he said. "We are costing ourselves tens of billions of dollars a year by measuring inflation incorrectly."

Dean Baker, co-founder of the Center for Economic and Policy Research in Washington, agrees that the current yardstick overstates the overall rate of inflation but said there's a separate question.

"Does it overstate for the senior population?" he asked. "Most of the evidence suggests otherwise."

That's largely because seniors are heavier consumers of health care, for which costs have risen faster than for other goods and services. And being less mobile, he said, older consumers are less likely to make substitutions.

The Bureau of Labor Statistics produces an experimental index called CPI-E to gauge inflation experienced by those 62 and older. From 1982 through 2011, the annual average rate of inflation for the CPI-E was 3.1 percent, the agency said, compared with 2.9 percent for the standard inflation measures.

The disparity occurred because the costs of housing and medical care — on which seniors spend more of their money — went up faster than the costs of other goods and services. But the agency notes that the gap has shrunk in recent years.

Republican lawmakers back a switch to chained CPI.

President Barack Obama's budget proposal adopts chained CPI, but with a few conditions. Among them: Social Security recipients would receive special increases in benefits — equal to 5 percent of the average retiree benefit, or around $800 annually — to be phased in gradually over 10 years once a retiree hits age 76.

Another raise would be phased in when a retiree turned 95.

And Obama says a switch to chained CPI must be accompanied by substantial increases in revenue raised through changes in the tax code.

The National Active and Retired Federal Employees Association organized a news conference outside the Capitol last month to ask lawmakers to vote against switching to chained CPI.

"Raising taxes on the wealthy is not a trade-off for hurting our nation's seniors," said Jessica Klement, a lobbyist for the organization.

Retirees say changing the inflation yardstick seems like a bait and switch.

"We make life decisions based on what we know the annuities will be and what seems sort of unfair is changing the rules after you make those life decisions and after you are retired," said Rick Swenson, 60, who retired last year as an administrative officer with the Department of Agriculture.

Using an online calculator created by the National Active and Retired Federal Employees Association, the Catonsville man figured that he would receive $95,000 less over 20 years under chained CPI.

"I'm like everybody else," he said. "I want to see a reduction in our deficit. Everybody will have to do their part. I just hope that it's fair and equal contribution."

Miller, the retired patent lawyer, said consumers' buying behaviors should not be a factor in calculating inflation.

"I could move to a high-cost area and I would not expect the government to increase my pension because I moved to a high-cost area," he said. "And I would not expect them to pay me less because I chose to move to a low-cost area.

"If the government is looking to save money, just be honest about it rather than saying this is a better way to measure inflation."

Goldwein said chained CPI would protect Social Security by reducing the program's long-term financial shortfall by more than 20 percent..

That's one reason Nick Troiano, 24, likes the inflation index. Last year, he co-founded The Can Kicks Back to urge lawmakers to stop delaying and address the national debt now.

"Social Security itself is on an unsustainable path," Troiano said. "In the next 20 years, there would be a 23 percent benefit cut for everyone if we don't do something about it.

"Chained CPI is a sensible reform. It's a technical change that would strengthen the program and help assure that Social Security is solvent for my generation."

The campaign, which is staffed by millennials, takes its message to college campuses.

"We tell our supporters the most important phone call they can make is not to elected officials, it's to their grandparents," he said. "The solution is not just bipartisanship, but generational. It's all the generations working together for a fair solution."

eileen.ambrose@baltsun.com

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