CPI Proposal for Social Security Reform

WASHINGTON, DC - MAY 06:  Keith Hall (R), Comm...

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While hopes for a “grand bargain” on deficit reduction between Democrats and Republicans appear to be fading, the concept may yet play an important role in future deficit reduction efforts by putting Social Security reform on the table. One proposal that may well live to fight another day is changing the method for indexing Social Security benefits to inflation from the CPI-W to the C-CPI-U. 

For those not fluent in Washington-speak, CPI-W is the Consumer Price Index for Urban Wage Earners and Clerical Workers – a measure intended to gauge the effects of inflation on urban workers. Some economists argue that the CPI-W overstates the level of inflation because it does not take into account the substitution effect that occurs when consumers facing higher prices switch to lower-priced goods. To remedy this shortcoming, the Bureau of Labor Statistics developed what's known as the C-CPI-U or “chained” CPI, which is supposed to account for broader consumer substitution. 

According to Charles Blahous of the Hoover Institution, since 2000 the “chained” CPI has averaged about 0.3 percent less per year than CPI-W. That may not sound like much outside the Beltway, but the ripple effects of reducing Social Security cost of living adjustments by 0.3 percent are significant. The Congressional Budget Office estimates the savings at a whopping $217 billion between 2012 and 2021. 

Of course, one person's technical change to the CPI is another person's benefit cut – and the idea of switching indexes has spurred an outcry by some Social Security defenders, who believe the cost of living adjustment should actually be increased to take into account rising health care costs for seniors. Nevertheless, look for any “grand bargain” dealing with Social Security probably to start with the C-CPI-U, perhaps in exchange for some form of means testing or a raise in the payroll tax threshold from the current $106,800.

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