August 23, 2014

A Better Way to Measure Inflation

  • Social Security, established in 1935, is the federal government’s largest program. It represents approximately one-fifth of the federal budget and...

Annual inflation increases are an important part of many government programs, including Social Security. Inflation protection is also provided in many parts of the tax code. But several advocates of fiscal reform – including the bipartisan National Commission on Fiscal Responsibility and Reform (Simpson-Bowles) and the Bipartisan Policy Center’s Debt Reduction Task Force (Domenici-Rivlin) -- have recommended using a more accurate measure of inflation.

There is a strong case for using this measure, known as the “chained CPI.” While beneficiaries and taxpayers would still be provided with inflation protection, the chained CPI would reduce the likelihood of excessive increases and thus help put the federal budget on a more sustainable path. Excluding lower interest costs, the 10-year deficit reduction would total $340 billion, with two-thirds coming from reduced spending and one-third from increased revenue.

According to media reports, President  Obama will propose switching to the chained CPI in his Fiscal Year 2014 budget, which is expected to be released tomorrow. Opponents of the idea have already begun to ramp up their criticism of it. In a recent blog post, however, the Committee for a Responsible Federal Budget (CRFB) clears up some confusion about the issue and offers a persuasive response to the critics.

“Experts from across the spectrum agree that the chained CPI is the best available measure for overall changes in the cost of living,” the blog post says. “Improved accuracy of inflation measurement should be a goal even absent budgetary impact, but especially given the many tough tax and entitlement choices policymakers will be facing to put the debt on a clear downward path. That is why every serious bipartisan budget plan . . . has recommended it.”

The Concord Coalition agrees with the CRFB, the Simpson-Bowles commission and the Domenici-Rivlin task force that a system-wide switch to the chained CPI makes sense.

The switch would be sound on its technical merits while at the same time providing a gradual level of deficit reduction that would not be disruptive to the economy in the short-term and would grow larger with time. The proposal is also consistent with a “balanced” approach to deficit reduction since it would both reduce spending and increase revenues.

To be clear, the chained CPI is not a magic bullet. Even a more accurate measure of inflation would not be nearly enough to close the gap between current-law benefit promises and projected revenues. It is, however, a good place to start.