CQ TODAY ONLINE NEWS
June 24, 2011 – 9:41 p.m.
Inflation Index Change Part of Debt Talk Mix
By David Harrison, CQ Staff
Powerful anti-tax and senior lobbying groups are prepared to fight a proposal supported by some Republican and Democratic lawmakers to change how the government calculates inflation.
Many economists say a different formula should be used to more accurately reflect how people change their buying habits when prices increase. But the proposed change would produce smaller increases in Social Security and other government benefits and push taxpayers into higher brackets — a result some call an indirect tax hike and Social Security benefit reduction.
Talk of replacing the current consumer price index, or CPI, as a measure of inflation with the “chained CPI” is not new in economic circles. But the change, which could save the government $300 billion over 10 years, has gained traction as a possible point of agreement in debt limit negotiations.
Democrats taking part in the talks have repeatedly insisted that they will not consider changes in Social Security. Some equate a new inflation calculation with a cut in benefits and pledge to oppose it.
“It’s not only a backdoor way to make cuts to Social Security, it’s an underhanded way to make cuts to Social Security,” said California Democratic Rep.
About $112 billion of the estimated $300 billion would reflect savings in the Social Security program, according to Committee for a Responsible Federal Budget. Benefits would grow more slowly than under the current system. President Obama’s fiscal commission recommended the approach.
The current inflation index assumes that consumers do not change their buying habits when goods become more expensive relative to other things. Over time, that ends up overstating inflation by one or two percentage points, said Jason Fichtner, senior research fellow at George Mason University’s Mercatus Center.
The chained CPI, by contrast, takes into account changes in buying habits as prices increase. For instance, a consumer might watch more movies on television if theater ticket prices rise.
“Your income is the same,” said Fichtner, who supports adopting the chained CPI. “But you’re substituting margarine for butter. Instead of going out to a fancy restaurant, you go out to Thai or Chinese.”
‘Subtle, almost imperceptible change’
While adjusting the inflation index would have modest impacts on Americans’ personal budgets, it would make a big difference from the government’s fiscal point of view.
“It’s a very subtle, almost imperceptible change, like a three-mile-an-hour breeze, but it affects the trajectory of federal spending and federal revenues,” said Jim Kessler, senior vice president for policy at Third Way, a center-left think tank. “It’s a good idea. It ought to be done.”
To some Democrats, however, the new index gives too little weight to health care costs, which usually increase faster than the inflation rate. Democrats argue that since senior citizens spend a greater share of their incomes on health care, a benefit structure pegged to the chained CPI would reduce their purchasing power and would amount to an unacceptable cut.
Inflation Index Change Part of Debt Talk Mix
“If anybody in this building wants to take on Social Security, privatize it, change the benefits by altering the consumer price index, or any other method, know this: ‘You’ve got a fight on your hands,’” said Rep.
AARP released a statement last week saying that “specific proposals such as the chained CPI should not be considered as part of the debt ceiling or deficit reduction negotiations.”
Anti-tax advocates at Americans for Tax Reform are wary of the tax implications. Since tax brackets move upward to reflect inflation, a chained CPI could slow that adjustment, leave many taxpayers in higher tax brackets and increase federal revenue by $87 billion over 10 years, according to the Committee for a Responsible Federal Budget.
The new index “would change tax law, forcing people to pay more in taxes than they otherwise would,” Americans for Tax Reform said in a blog post. Ryan Ellis, the group’s tax policy director, said the organization would oppose revising the index unless the change was accompanied by offsetting tax cuts.
But changing the way inflation is calculated could allow lawmakers to claim they have brought down the nation’s debt without explicitly cutting programs or raising taxes. Even as the debt talks appeared imperiled after Republican lawmakers withdrew last week, some in both parties pointed to the chained CPI as an area of potential agreement.
Senate Budget Chairman
Illinois Republican Sen.
If the new inflation index becomes part of an overall agreement, it will happen over the objections of AARP, a powerful lobbying force in Washington. The group has been successful in keeping broad cuts to Social Security out of the debt talks, and it has vowed to “keep up our drumbeat” to resist smaller changes that could affect the program, such as the change in inflation calculations, said David Certner, AARP’s director of legislative policy. “There’s still a little concern there could be some tweaks made. Some bad tweaks,” he said.
Brian Friel contributed to this story.