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Words You Should Know — “Chained CPI”

17 Dec 2012

Words You Should Know — “Chained CPI”

Pegging benefit payments and parts of the tax code to a new consumer price index called the “Chained CPI” sounds like a debt-deal no-brainer. It’s a single tweak that could raise about $72 billion in tax revenue and cut spending by about $145 billion through 2021, according to the CBO’s 2011 calculations. It could be enacted quickly, and would ramp up so slowly that it could be 10 years before anyone notices they’ve been hit by both a tax increase and a benefit cut. “It’s a more accurate cost-of-living adjustment, and that certainly recommends it,” said Jared Bernstein, a former White House adviser and a senior fellow at the Center on Budget and Policy Priorities. But “it’s a benefit cut, and it’s a benefit cut that grows as you age, because the more you age, the more the difference compounds over time,” he said. Switching to the chained CPI is a mainstay of deficit-reduction recommendations, and President Obama and House Speaker John Boehner floated the idea during the 2011 debt-ceiling negotiations. It’s unclear, though, whether the switch will gain much traction this time around. One issue, it touches Social Security. In Washington, no solution is ever that simple—particularly when it involves Social Security. JUST A BIT MORE INFO Here’s how the new metric would save money: Social Security, federal pensions, and military and veterans’ benefits are indexed to rise each year with inflation; so are tax brackets, exemptions, deductions, and credits. But experts say the consumer price index the government currently uses overstates how rising prices affect household spending. The Bureau of Labor Statistics has come up with a more accurate measure, which accounts for consumers’ tendency to switch to cheaper categories of products when prices rise. Rather than looking at a fixed set of goods—as the standard formula does—the new measure looks at how the set of goods changes, and then “chains” two consecutive months of consumption data together. The chained CPI rises a little more slowly than the current measure. So if the chained CPI were used to calculate cost-of-living increases, it would mean smaller increases to Social Security checks each year. If the chained CPI were applied to the tax code, it would move taxpayers into higher tax brackets faster.

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