Change So Small You Can’t Even See It

It only took two minutes of reading about the chained Consumer Price Index (CPI) to see why the president has gone gaga over this. The possibility of using such tiny adjustments to come up with billions in savings in Social Security expenditures as a debt ceiling bargaining tool during negotiations with congressional Republicans must have had President Obama salivating. It is complicated, sophisticated, and makes less of an immediate impact on a retirees COLA increase than an Olympic gold medal diving champion does when he cleaves the water beneath the high dive. The change is so small at the beginning, in fact, that just like the healthcare reform law, you don’t even notice that anything has changed.

In 1996, the Advisory Committee to Study the Consumer Price Index (the Boskin Commission) found that both CPI-U and CPI-W overstated inflation in a number of ways, which they estimated to total about 1.1 percentage points per year. The Bureau of Labor Statistics responded by making a number of changes to the way they measured CPI-U and CPI-W, which corrected much of the biases in the two indices.

However, a portion of the bias – upper level substitution bias for changes between categories – cannot be addressed through the existing CPI-U and CPI-W for technical reasons. Instead, BLS created a new measure of inflation – the chained CPI (also known as the superlative CPI or the C-CPI-U) – in 2002 to account for consumer substitution between categories. This measure has been refined and improved since it was initially published. Unlike the methodological changes in the calculation of CPI-U and CPI-W that are automatically reflected in the published measures used for indexing programs under current law, using the more accurate chained CPI for indexation instead of the CPI-U or CPI-W requires a statutory change in law.

The Case for the Chained CPI

The first reason why the Obama Administration isn’t out selling this or any other proposal the White House has come up with lately is because they can’t sell squat. The second reason why the Obama Administration isn't out selling this idea is because the White House is not even willing to admit that it is considering using the chained CPI proposal as a bargaining chip. Why? The uncomplicated, unsophisticated version of the chained CPI methodology is "retirees will get smaller and smaller Social Security checks."  

The provisions affected by the move to chained CPI are designed to be indexed to changes in overall cost of living; rather than serving to raise taxes and cut benefits, switching to the chained CPI would simply be fulfilling the mission of properly adjusting for cost of living.

The Case for the Chained CPI

The chained CPI is a technocrat’s dream solution for a seemingly logical and effective method to begin to address future financial shortfalls in the Social Security trust fund. This is a Barack Obama special—change so small at first you can’t even see it. It is change that is so incremental, with practically no upside for current or future Social Security participants, that neither the president’s staffers nor the Democrats in Congress have half a chance of selling his idea as a reasonable bargaining chip in the debt ceiling talks.

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