By Robert Yentzer
4:42 PM EST, January 28, 2013
When it comes to fixing America's ballooning debt problem, there is one policy option that both Democrats and Republicans should be rushing to embrace. It is the proposal to replace the current Consumer Price Index (CPI) with a more accurate measure of price inflation: the Chained-CPI. If this index were used to calculate cost of living increases in Social Security benefits, income tax brackets and the like, the government could realize significant savings. The current CPI's exaggerated estimates of inflation are a wasteful leak in the fiscal pipeline. Politicians who are serious about "rooting-out government waste and inefficiency" should be demanding a switch to the Chained-CPI.
The problem with the current CPI is that its estimates of inflation almost always err on the high side. The seriousness of this "upward bias" was exposed in 1996 by a study panel appointed by the U.S. Senate, known as the Boskin Commission. It reported that prior to 1996 the CPI had been overstating the annual inflation rate by a whole percentage point. Since then, a series tweaks to the CPI's methodology have improved its accuracy, but today it still overstates inflation by around 0.3 percent.
The effects of exaggerating inflation by 0.3 percent are obvious. When Social Security payments are increased in line with the CPI, beneficiaries get a pay raise that exceeds inflation, and this overpayment grows as the extra 0.3 percent is compounded over time. Similarly, when the CPI is used to adjust income tax brackets, billions of dollars elude taxation because the threshold to the next bracket is set too high. By causing the government to overspend on benefits and under-collect taxes, the current CPI contributes systematically to the debt problem.
According to a conservative estimate by the Congressional Budget Office, a switch to the Chained-CPI could reduce deficits by $200 billion over 10 years: $112 billion from lower Social Security payments and $72 billion from extra tax revenue. If the switch extends to civilian and military pensions, another $20 billion could be saved.
Like all belt-tightening options, the proposal for a Chained-CPI elicits no joy. But because it is better than most of the alternatives, it has gained the support of academics and think-tanks across the political spectrum, from the Brookings Institution to the American Enterprise Institute. It is a sensible and efficient debt-control measure for several reasons:
•The Chained-CPI is not a recent invention of special interests or political ideology; rather, it is a technical fix to a problem that has been recognized for decades. The Bureau of Labor Statistics developed it to measure the cost of living more accurately, and rigorous testing has been underway for at least a decade.
•The Chained-CPI delivers what Social Security recipients have been promised: an honest adjustment for inflation. An "honest adjustment" does not cut legal entitlements, but it does curtail erroneous bonuses.
•The Chained-CPI satisfies President Barack Obama's call for a balanced approach to debt reduction because it would raise tax revenues as well as reduce spending. Since current seniors would share the burden of debt reduction with younger households, it is also balanced in terms of intergenerational fairness.
Of course, the guardians of senior entitlements disagree. They claim that the Chained-CPI would be unfair to seniors because it assigns too little weight to one of their biggest expenses: medical care. That complaint should be weighed against a disturbing fact: the medical benefits received by the elderly are massively subsidized by the younger generation.
The average two-earner couple that retires today will end up receiving three dollars in Medicare benefits for every dollar they ever paid in. That amounts to a $240,000 transfer of income from young workers. The lifetime subsidy for a one-earner couple is even greater — about $300,000. There must be a reasonable limit on how much the elderly can extract from the livelihoods of upcoming generations; and the Chained-CPI is a good place to start.
Robert Yentzer is a retired economics professor from the Community College of Baltimore County. He lives in Florida. His email is firstname.lastname@example.org.
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