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Balanced budget rests on altering price index New math would cut benefits, raise taxes


WASHINGTON -- Just when it seemed Republican budget-cutting efforts couldn't get bolder comes word that GOP leaders are considering two of the riskiest political moves imaginable: raising taxes and stunting the growth of Social Security benefits.

What's more, President Clinton and congressional Democrats may join them. And if they do it right, antitax lobbyists and senior citizen advocates might not complain too loudly.

Doing it right is the tricky part.

The changes would come through an adjustment in the Consumer Price Index, a monthly sampling of prices charged for 95,000 goods and services typically purchased by U.S. households.

The index has a powerful role in the U.S. economy because it is used as the basis for calculating cost-of-living increases in salaries, benefits, pensions and income taxes. But the inflation adjustment is believed to be too high.

Many economists, including Federal Reserve Board Chairman Alan Greenspan, say the index overstates living costs because it does not consider improvements in the quality of products or changes in consumer buying patterns when prices rise.

For example, a price sampling of refrigerators does not reflect the fact that modern appliances operate more efficiently at lower energy cost. Marking the rise in beef prices doesn't account for those families who switch to chicken or another cheaper alternative.

As a result, the current inflation formula may be costing the government billions of dollars through higher benefit payments and undercalculated tax bills.

"It seems to me that this is something that should have been addressed years ago," Senate Majority Leader Bob Dole said in commenting on a report that found the CPI may be overstating the cost of living by as much as two-thirds. "We've always backed away from it because we didn't have strong bipartisan support."

Despite the long-term advantages of correcting the index formula, politicians have been fearful of the short-term political heat. Even a slight change would affect millions of Americans by slowing the growth of their incomes.

For example, a retiree expecting Social Security payments next year of $720 per month next year would get $7 a month less and lose a total of $84 for the year if the inflation adjustment is dropped by one percentage point.

Over seven years, using Congressional Budget Office projections, the worker would lose a total of more than $2,600, says the American Association of Retired Persons.

Union members working under contracts tied to the price index would also see smaller raises. For auto workers at the General Motors plant in Baltimore now making $19.50 per hour, a drop in the inflation adjustment of one percentage point would mean their cost-of-living increase next year would be 19 cents an hour lower, says the AFL-CIO.

That would mean a total loss of $395 for the year.

Many of these same Americans and millions more could wind up paying higher taxes as well.

Tax rates, deductions and exemptions are adjusted for inflation so that people aren't pushed into higher brackets when their wages only keep pace with inflation.

A drop in the price index means less of a cushion. A single taxpayer making $35,000 next year would pay an extra $50 in taxes if the index goes down by one percentage point, according to the National Taxpayers Union.

Neither the president nor lawmakers want to alienate the many voters who stand be affected by any adjustments to the index.

"They're scared of what the American Association for Retired Persons will say and others will say," Sen. Daniel P. Moynihan, a New York Democrat, who is among the leading proponents for discounting the price index, said in a television interview.

With so much pressure this year to balance the budget, though, the lure of the money that could be saved by simply a small change in the inflation adjustment may convince Mr. Clinton as well as lawmakers of both parties that it's worth taking the risk.

Dropping the CPI -- now a little less than 3 percent -- by 0.5 percent would save more than $140 billion over seven years. A one percentage point drop would save more than the $270 billion Republicans plan to squeeze out of Medicare during that same period.

The GOP budget agreement passed this year already includes a 0.2 percent drop in the index.

A convenient moment for reaching such a decision could come later this year when White House and congressional negotiators will be looking to strike a deal on the budget.

"It looks like a very nice plug to me," said Bill Cunningham, a lobbyist for the AFL-CIO, which worries about the effect on union workers. "The only question is how they're going to do it. My

guess is they'll delay the effect until after the next election, but take the savings today."

Changing the index without triggering a political backlash will require deft political footwork.

"If the government is going to correct the CPI so that it is a better indicator of inflation and makes the indexes that are tied to it more accurate, who could complain about that," said David Keating, of the National Taxpayers Union. "But if they're just doing it to fill a hole in the budget, we're going to call it a tax increase on the middle class."

The White House, taking its cue from labor and other interest groups fearful of the change, insists there be some economic rationale for the adjustment.

"We should not make the CPI a grab-bag in order to try to fill a need in terms of the budget," said White House chief of staff Leon Panetta. "If there is a legitimate argument -- and I think there is -- that we ought to look at the accuracy of that formula, then it ought to be done by economists and by experts."

But there is no consensus among economists about how much the inflation adjustment should be changed.

A commission appointed by the GOP-controlled Senate Finance Committee recently reported that the index may be overestimating the cost of living by anywhere from 0.7 percent to 2 percent.

It recommended a drop of 1 percent. That conclusion was challenged by White House Budget Chief Alice Rivlin and others, who said the commission was packed with members who started with the view that the index is too high.

The Congressional Budget Office, which conducted its own study last year, estimated the index overstates growth by 0.2 to 0.8 percent.

The American Association of Retired Persons, which threatened yesterday to mobilize its 33 million members to resist a change that smacks of a political fix, says its won't be satisfied with a drop in the index unless it is blessed by the federal Bureau of Labor Statistics, the agency that calculates the index and is conducting its own review.

"We don't oppose making the index a more accurate measure of inflation," said John Rother, chief lobbyist for the group. "But it has to be objective."

When CPI drops

Here are three examples of the impact of lowering the Consumer Price Index by one percentage point:

Social Security

A retired worker now drawing a $698-per-month payment would get $720 per month next year, under current calculations. With a 1 percent decrease, he would get $713 per month -- drawing $84 less for the year.

Income Tax

A single taxpayer earning $35,000 per year would pay about $50 more next year because the inflation adjustment would be lower, thus pushing him into a higher bracket. A married couple with two children earning $60,000 annually would pay about $100 in additional taxes.

Labor Contracts

An autoworker at General Motors earning $19.50 per hour under a contract with increases tied to the CPI would get a raise next year that is 19 cents per hour lower, earning $395 less for the year than if there were no change.

Source: The American Association of Retired Persons; the National Taxpayers Union; the AFL-CIO.

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