By making revisions that slow the growth of the Consumer Price Index (CPI), the government cuts benefits without legislation, adding hundreds of billions back into the federal budget. Not only is less money spent on current benefits, but the overall growth rate in future benefits is also reduced. This frees up more Social Security surplus for other government spending or to cover the cost of tax cuts.

The federal budget deficit first brought attention to the CPI in the mid-nineties. In 1994, some economists asserted that the federal budget could not be balanced without changes to the CPI. More than one-third of all federal expenditures have a Cost-of-Living Adjustment (COLA) tacked on to them. Within the next decade, the economists estimated COLAs would become the fourth largest federal expenditure after Social Security benefits, defense, and debt service.

In 1996 and 1997, while Congress and President Clinton were under pressure to balance the budget, they considered a politically risky plan to legislate changes to the CPI. In 1996, a commission of five prominent economists headed by Michael Boskin said the government could achieve $500 billion in savings over 10 years by chopping the CPI by 1.1%. Neither side, however, wanted to face the political flap that would come from cutting benefits. Meeting behind closed doors in May of 1997, an eleventh hour decision was made to rely on the Bureau of Labor Statistics (BLS) to make technical revisions. The government refers to the changes as “improvements” to “correct” the CPI, and the changes have resulted in slowing the rate of CPI growth and cutting COLAs, by about 0.8 percentage point.

Is Your COLA Keeping Up With Your Health Care Costs?

1998
COLA Received: 2.1%
Medigap Health Insurance: 8.2%
Prescription Drugs: 16%

1999
COLA Received: 1.3%
Medigap Health Insurance: 10%
Prescription Drugs: 17.4%

2000
COLA Received: 2.4%
Medigap Health Insurance: 24%
Prescription Drugs: 18.4%

2001
COLA Received: 3.5%
Medigap Health Insurance: 18%
Prescription Drugs: 21%

2002
COLA Received: 2.6%
Medigap Health Insurance: 19%
Prescription Drugs: 17%

Significant Stats:
79.2%  amount health insurance premiums have increased over the past 5 years.
89.8%  amount prescription drug spending has increased over the past 5 years.
11.9%  amount your COLA has increased over past 5 years.

Sources: “U.S. Gov’t Uses Creative Accounting,” Martin Crutsinger, "The Associated Press," July 14, 2002. “CPI Revision Won’t Eliminate Basic Flaw,” Tony Snow, Conservative Chronicles, December 25, 1996. “A New Way to Look at Prices,” "The New York Times," December 5, 1996.

For more on this, see “Ask The Advisor Background Report: How Revisions to the CPI Can Spell Lower COLAs,” at http://www.tscl.org/NewContent/100863.asp.

October 2002