A congressional super committee tasked to slow the nation’s rising debt appears to have reached consensus on dampening future cost-of-living adjustments for federal entitlement programs, including military retirement, through use of a chain-weighted Consumer Price Index.
If that CPI were already in use, military retirees, disabled veterans and social security recipients would be getting a 3.4 percent increase in January rather than the planned 3.6 percent, government price data show.
Democrats and Republicans on the powerful 12-member Joint Select Committee on Debt Reduction, otherwise know as the supercommittee, offered separate partisan packages last week toward trimming at least $1.2 trillion off projected budget deficits over the next decade. Republican members predictably stuck to their pledge not to accept new taxes, which Democrats demanded for “balance” of sacrifice.
A feature said to be in both packages is adoption of the chain-weighted CPI for adjusting federal entitlements, a move estimated to save $200 billion over 10 years. Many economists say the it is a more accurate index of inflation because it addresses “substitution bias” found in traditional consumer price indices run by the Bureau of Labor Statistics.
Many entitlements now are adjusted based on the CPI for Urban Wage Earners and Clerical Workers, or CPI-W. They track prices for a market basket of good and services, which are weighted based on spending patterns of American of mostly blue-collar workers. Every two years the government conducts a new survey to readjust how goods and services are weighted in the basket.
What CPI-W doesn’t do is change the mix of goods and services surveyed to reflect changes in spending behavior. For example, as the price of beef rises, consumers buy less beef and more chicken. Because CPI-W doesn’t take account of that, critics contend, it exaggerates inflation.
The weighted CPI reflects not only changes in prices but in spending behavior, from more expensive items to less expensive substitutes. But critics of this index argue it ignores the fact that consumers might prefer beef to chicken. So that over time the weighted CPI will leave consumers feeling worse off because of what they can’t afford.
Recent debt-reduction reports, including the National Commission on Fiscal Responsibility and Reform last December, have recommended adopting the weighted CPI for Urban Consumers (C-CPI-U). Since 2002, when BLS first established this index, it has measured inflation rising at a slower pace, almost 0.3 percent a year lower than the CPI-W.
Testifying Tuesday before the super committee, the co-chairpersons of the fiscal reform commission again endorsed shifting to the chain CPI. “If we could do it government-wide it would save billions,” said Alan Simpson, a Republican and former senator from Wyoming. No criticism was offered.
Erskine Bowles, Simpson’s partner on the commission, included the weighted CPI feature in a $3.9 billion possible debt reduction deal he outlined for super committee members, contending most elements were agreed to previously by Democrats and Republicans. Bowles indicated the weighted CPI was a feature he knows both sides of the super committee support.
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