April 10, 2013

Chained CPI: Good Policy? Yes. Social Security Reform? No.

Charles Blahous

J. Fish and Lillian F. Smith Chair
Summary

Should the president’s budget propose the transition to “chained” Consumer Price Index (CPI), it would mark a positive step in more accurately measuring economy-wide inflation for the purpose of indexing federal programs. But according to Mercatus Center senior research fellow Charles Blahous—a public trustee for Medicare and Social Security—CPI reform should not be confused with Social Security reform.

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CPI reform, though technically meritorious, does not constitute Social Security reform. It would only improve the Social Security outlook over the next 75 years by less than that outlook has deteriorated over just the last two.”

Should the president’s budget propose the transition to “chained” Consumer Price Index (CPI), it would mark a positive step in more accurately measuring economy-wide inflation for the purpose of indexing federal programs. But according to Mercatus Center senior research fellow Charles Blahous—a public trustee for Medicare and Social Security—CPI reform should not be confused with Social Security reform.

Blahous comments on the often inaccurate portrayal of CPI reform below.

To be clear, I favor CPI reform. Adopting chained-CPI simply complies with the clear intent of current law, which is to measure general inflation as accurately as possible.

But while technically meritorious, CPI reform has nothing to do with ‘reforming’ Social Security or any other entitlement program. It is a budget-wide technical correction that happens to have a very slight positive spillover effect on Social Security finances.

It would also have the long-term effect of increasing income tax collections, but no one would seriously call this 'tax reform.' It is similarly inappropriate to call it 'entitlement reform.'

In sum, adoption of chained-CPI would improve the Social Security outlook over the next 75 years by less than that outlook has deteriorated over just the last two. So even with the change, Social Security would still be in worse shape than it was as recently as 2010. The continued neglect of the program’s financing shortfall is weakening Social Security far more than a CPI adjustment would strengthen it.

Social Security reform requires addressing the significant imbalance of Social Security tax and benefit schedules. This requires savings roughly five to six times as large as the effects of CPI reform.

Confusing CPI reform with Social Security reform creates the illusion that correcting CPI makes the need for real Social Security reform substantially less urgent. This is a dangerous misperception; a comprehensive repair of Social Security finances is sorely needed before the problem grows too large to be solvable.

Those who oppose CPI reform because they fear its effects on benefit growth are approaching the problem backwards. The purpose of annual COLA adjustments isn’t to provide a particular benefit level—it’s to adjust for general price inflation as we can best measure it. If we’re serious about preserving benefit security, we should focus instead on promptly enacting a comprehensive solvency solution. Without such action, Social Security beneficiaries face genuine benefit cuts, starting with 21-percent reductions for disability beneficiaries in 2016. Beneficiaries have much more to fear from leaving program solvency unaddressed than they do from technical corrections to the CPI.”

Please see “Reforming CPI: Not A 'Grand Bargain' But A Prudent Reform” for a more in-depth discussion of CPI reform.