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CBO: Using Chained CPI for Social Security Hurts Seniors

CBO: Using Chained CPI for Social Security Hurts Seniors

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Published by Patricia Dillon
CBO examined an experimental inflation measure called CPI-E, which weights health care and other goods and services more heavily than existing measures of inflation because seniors consume them disproportionately.

What they found is that over the last 30 years, inflation as measured by existing consumer price indices has typically been lower than inflation as measured by CPI-E.
In other words, prices rise faster for seniors than for the population at large — which means slowing the growth of cost of living increases will particularly disadvantage seniors, who are already seeing their living costs outstrip their benefits.

“The possibility that the cost of living may grow at a different rate for the elderly than for the rest of the population is of particular concern in choosing a price index for Social Security COLAs because Social Security benefits are the main source of income for many older people,” CBO writes.

http://tpmdc.talkingpointsmemo.com/2013/04/why-obamas-stealth-social-security-cut-is-bigger-than-it-seems.php?ref=fpb
44083_ChainedCPI
CBO examined an experimental inflation measure called CPI-E, which weights health care and other goods and services more heavily than existing measures of inflation because seniors consume them disproportionately.

What they found is that over the last 30 years, inflation as measured by existing consumer price indices has typically been lower than inflation as measured by CPI-E.
In other words, prices rise faster for seniors than for the population at large — which means slowing the growth of cost of living increases will particularly disadvantage seniors, who are already seeing their living costs outstrip their benefits.

“The possibility that the cost of living may grow at a different rate for the elderly than for the rest of the population is of particular concern in choosing a price index for Social Security COLAs because Social Security benefits are the main source of income for many older people,” CBO writes.

http://tpmdc.talkingpointsmemo.com/2013/04/why-obamas-stealth-social-security-cut-is-bigger-than-it-seems.php?ref=fpb
44083_ChainedCPI

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Published by: Patricia Dillon on Apr 25, 2013
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09/09/2013

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CONGRESS
 
OF
 
THE
 
UNITED
 
STATES
 Testimony Using the Chained CPI to Index Social Security, Other Federal Programs,and the Tax Code for Inflation
 Jeffrey Kling  Associate Director for Economic AnalysisBefore theSubcommittee on Social Security Committee on Ways and MeansU.S. House of Representatives April 18, 2013
This document is embargoed until it is delivered at 9:30a.m. (EDT) on Thursday, April 18, 2013. The contents may not be published, transmitted, or otherwise communicated by any print, broadcast, or electronic media before that time.
 
Contents
CBO
Summary 
1
Inflation and Changes in the CostofLiving 
2
 The Consumer Price Index and Someof Its Limitations
2Substitution Bias3Small-Sample Bias4
 An Alternative Measure: TheChainedCPI-U
4Estimates of Differences Between Traditional and Chained Indexes5Revisions to the Chained Index5
Using the Chained CPI-U to Index Social Security, Other Federal Programs, and the Tax Code
7Budgetary Effects8 Approaches for Dealing With the Delay in Determining the Final Value of theChained CPI-U10
Measures of Inflation for SpecificPopulations
12
 Appendix: Cohort-Specific Approaches to Indexing Social Security With the Chained CPI-U
15
 About This Document 
17
 Table
Figures
 
Chairman Johnson, Ranking Member Becerra, andMembers of the Subcommittee, thank you for inviting me to testify this morning. As you know, Social Security law tries to protect beneficiaries from the effects of rising prices by specifying that a beneficiary’s monthly paymentbe automatically adjusted each year for inflation, as mea-sured by the change in a consumer price index. Similaradjustments occur in many other federal programs andmany parts of the tax code. Without such indexing, a risein the general level of prices would alter the effects of fed-eral policies even in the absence of action by lawmakers.My statement focuses on four questions about indexing:
1
How does the chained consumer price index (CPI)differ from the traditional consumer price index?
 What would be the budgetary effects of using thechained CPI to make automatic adjustments in SocialSecurity, other federal programs, and the tax code?
How could such a change be implemented?
How do measures of inflation for specific populationsdiffer from overall measures?Changing the measure of inflation used for indexing isonly one of many possible modifications to federal policy for Social Security, other programs, and the tax code. If the Congress wishes to slow the growth of federal spend-ing by constraining outlays for Social Security benefits, orto improve the long-term solvency of the program by making changes to its spending or revenues, many otherapproaches are possible. Other changes to Social Security benefits and taxes would affect the federal budget andindividuals in different ways, as the Congressional BudgetOffice (CBO) discussed in
Social Security Policy Options 
 (July 2010); possible changes to a broad array of federaltax provisions and spending programs were analyzed by CBO in
Reducing the Deficit: Spending and Revenue Options 
(March 2011).
Summary 
Cost-of-living adjustments (COLAs) for Social Security benefits and other parameters of many federal programsand the tax code are currently indexed to increases in thetraditional CPI, a measure of overall inflation calculatedby the Bureau of Labor Statistics (BLS). According tomany analysts, however, the CPI overstates increases inthe cost of living because it does not fully account for thefact that consumers generally adjust their spending pat-terns as some prices change relative to other prices andbecause of a statistical bias related to the limited amountof price data that BLS can collect. One option for law-makers would be to link federal benefit programs and tax provisions to another measure of inflation—the chainedCPI—that is designed to account fully for changes inspending patterns and that does not have the samestatistical bias.The chained CPI grows more slowly than the traditionalCPI does: an average of about 0.25 percentage pointsmore slowly per year over the past decade. As a result,using that measure to index benefit programs wouldreduce federal spending for Social Security, federalemployees’ pensions, Medicare, Medicaid, and variousother programs. For example, if such a proposal took effect next year, Social Security benefits would be roughly $30 a month lower, on average, by 2023 than they wouldbe under current law, representing a reduction of about2percent of average benefits. (Depending on when they started receiving benefits, some people would see greater percentage reduction and others a smaller one.)Inaddition, indexing tax provisions with the chained CPI would increase revenues.If all uses of the traditional CPI in mandatory programsand the tax code were switched to the chained CPI start-ing in calendar year 2014, mandatory spending would bereduced by a total of $216 billion between fiscal years2014 and 2023, and federal revenues would be increasedby $124 billion. (The President’s budget for fiscal year2014 includes a related but less comprehensive optionthat would use the chained CPI for Social Security andsome other spending programs as well as for the tax sys-tem. CBO is currently reviewing that and other proposalsin the President’s budget.) Although many analysts consider the chained CPI to beamore accurate measure of the cost of living than thetraditional CPI, using it for indexing could have dis-advantages. The values of the chained CPI are revisedover a period of several years, so affected programs andthe tax code would have to be indexed to a preliminary estimate of the chained CPI that is subject to estimation
1.This document updates earlier work by CBO about the chainedCPI-U; see Congressional Budget Office,
Using a Different  Measure of Inflation for Indexing Federal Programs and the Tax Code 

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