Fed Chairman Calls For Changes In Calculating Cpi Revisions Could Lower Social Security Payments, Raise Taxes

The government should quickly change its inflation measure in ways that will trim Social Security and other benefits and raise taxes for millions of Americans, Federal Reserve Chairman Alan Greenspan told Congress on Thursday.

In his strongest comments to date on the matter, Greenspan took issue with critics who have called such changes a “political fix” to give lawmakers a backdoor way to address the government’s budget problems.

“On this issue, we should let evidence, not politics, drive policy,” Greenspan said.

In testimony before the Senate Finance Committee, Greenspan said he fully agreed with the views of a CPI report issued in December by five prominent economists, led by Michael Boskin of Stanford University.

The Boskin commission said the CPI was overestimating inflation by 1.1 percentage points annually, an error that will cost the government $1 trillion over the next 12 years in too generous cost-of-living increases and lost tax revenue.

Greenspan said Congress should create an independent commission of prominent economists to provide Congress annually with an estimate of the upward bias remaining. The panel’s estimate would be used to adjust the CPI downward for use in figuring cost-of-living increases and adjusting tax brackets to keep inflation from pushing taxpayers into higher brackets.

“This type of approach would have the benefit of being objective, non-partisan and sufficiently flexible to take full account of the latest information,” he said.

The CPI has a variety of impacts on the amount of federal taxes individuals pay. It is used to adjust tax brackets that determine what amount of a person’s income is taxed at what rate. It is also used to adjust the personal exemption and standard deduction that taxpayers can claim for themselves and their dependents.

Greenspan also urged the Bureau of Labor Statistics, which produces the CPI, to fix the bias problems that could be addressed quickly, such as updating the “market basket” of goods more frequently. But he said other issues, such as a failure to measure quality changes properly, would take much longer and for that reason the commission should be used to adjust cost-of-living benefits.

Greenspan’s two-track plan won enthusiastic backing Wednesday from Sen. Daniel Patrick Moynihan, top ranking Democrat on the Finance Committee and a leading proponent of changing the CPI.

“If we fail to make this correction, it will cost the Treasury a trillion dollars in the next 12 years,” Moynihan said. “If we do it, we can move out of this protracted (budget) crisis that is so draining on the country.”

Other senators indicated interest in Greenspan’s proposal but wondered how the commission would operate.

Greenspan said he envisioned a panel composed of highly regarded experts in the field of inflation measurement. He said the group should have a permanent staff but work closely with experts at the BLS.

The American Association of Retired Persons immediately raised objections to an outside panel’s picking a number by which each year’s cost-of-living increase would be reduced.

“You can’t just pull five or 10 people out of a hat and tell them to come up with a number that the BLS does not see,” said David Certner, AARP’s director of economic issues. “That is the whole point of having an independent BLS that acts on statistical reasons, not political reasons.”