December 4, 1996 in Nation/World

Government Re-Evaluates Cost Of Living A Smaller Adjustment For Inflation Means Reduced Benefits For 60 Million People

Clay Chandler And John M. Berry Washington Post
 

A congressional advisory commission Wednesday will recommend alterations in the government’s method of calculating changes in consumer prices that would slow the growth of many federal benefit programs by 1.1 percentage points annually, according to sources who have been briefed on the panel’s conclusions.

The effects of such a change would ripple through the U.S. economy. The incomes of about 60 million Americans - approximately one in five - are affected by the government’s annual cost-of-living adjustments in Social Security payments, veterans benefits and federal pensions.

The conclusions of the commission, headed by Stanford University economist Michael J. Boskin, also could have far-reaching implications for this year’s federal budget battle. According to calculations made last year by the Congressional Budget Office, a 1 percentage point reduction in the Consumer Price Index - the official gauge used by the government to calculate payment increases for federal benefit programs and set income tax brackets to offset inflation - could slash the federal budget deficit by close to $100 billion between now and 2002, the target year for balancing the budget.

The change could significantly improve the chances of a budget deal, because it would reduce the amount of tax and spending changes that Clinton and congressional Republicans must agree on in order to wipe out the deficit.

However, implementing such a revision could prove politically treacherous for leaders on both ends of Pennsylvania Avenue. Politicians from both parties are wary of being blamed for rolling back those benefits - or even worse, tagged for raising taxes.

To complicate matters, many economists disagree on whether the CPI overstates changes in the cost of living by as much as the commission claims.

For these reasons, many analysts express skepticism that the Boskin panel’s recommendations will ever be adopted.

“This is an issue that either party can demagogue to death,” one leading budget economist warned Monday. “With all due respect, Mike Boskin isn’t much of political shield. If you’re a congressman, you can’t exactly go back to your district and say, ‘Hey, I’m sorry we reduced your benefits, but Professor Boskin said it would be OK.’ ”

Boskin, who served as chairman of the Council of Economic Advisers during the Bush administration, is scheduled to present the commission’s recommendations to members of the Senate Finance Committee today. The committee appointed the commission last year.

Congressional budget sources said Monday that they expected Boskin to urge that the major changes to the way in which the CPI is calculated be made at the administrative level rather than as the result of specific legislation.

Such a move would spare legislators a formal vote for benefit reductions. But officials in the Bureau of Labor Statistics, the government agency that calculates the index, have expressed skepticism that the degree of overstatement of the cost of living by the CPI is as large as 1.1 percentage points a year.

Commissioner of Labor Statistics Katharine G. Abraham said, “I won’t have any comments about the report until after it is released.”

Most of the issues focused on by Boskin’s group were identified as problems decades ago, but statisticians have so far not come up with a way to deal with them. In other cases, BLS itself has made several small changes over the past two years to improve the CPI, which along with other changes planned for the next two years, will together trim at least half a percentage point off the annual rise in the index.

xxxx THE RIPPLE EFFECT Any change in the way the Consumer Price Index is figured would ripple across the economy and through the personal finances of nearly everyone. For instance, Social Security payments for next year are being calculated on the basis of a 2.9 percent increase in the cost of living. If that increase was 1.1 percentage points lower, the average monthly payment, now $724, would go to $737 rather than to $745 - a difference of $8 a month, or $96 a year. The effect would build on itself because a lower payment next year would mean a lower starting point when the benefit was adjusted for inflation the following year. In 15 years, the difference would amount to several thousands of dollars a year per recipient. - New York Times


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