Greenspan Urges Use of New CPI

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Greenspan Urges Use of New CPI—Would Cut COLAs

Federal Reserve Chairman Alan Greenspan has called on Congress to adopt a new Consumer Price Index (CPI) to measure Cost-of-Living Adjustments (COLAs). The new CPI would not boost senior COLAs. To the contrary — it would cut them even further than other recent changes. Had such indexing been in place during the past decade, said Greenspan, “the fiscal 2002 deficit would have been $40 billion smaller, all else being equal.”

The implications for COLA recipients are enormous. According to the Bureau of Labor Statistics (BLS) data, inflation as measured by the new C-CPI-U for 2001, the most recent year for which final data is available, was 0.4 percentage points lower than as measured by the currently used CPI. Social Security recipients received a 2.6% COLA effective on January 1, 2002. But had the COLA been indexed using the C-CPI-U, their increase would have been just 2.2%.

The C-CPI-U was a key recommendation of a 1996 Advisory Commission on the Consumer Price Index. Economist Michael Boskin said that the government overpays Social Security and other COLA recipients because the CPI overstates the rate of inflation by about 1.l%. Congress, under pressure to balance the budget, considered the politically risky move of legislatively cutting COLAs, but decided instead to rely upon the Bureau of Labor to make a series of changes to the methodology used to calculate the CPI. According to CBO estimates, the cumulative effect of changes already implemented by the BLS result in reducing the growth rate of the CPI by about 0.8 percentage point. Adopting the C-CPI-U would result in a further reduction of about 0.4 percentage point and more than accomplish the Boskin Commission recommendation of a 1.1% CPI reduction.

A new study by Advisor editor Mary Johnson found that a person who received an “average” benefit of $852 in 2001 would effectively have his or her COLA cut by a staggering $7,842 over 10 years, indexing with the C-CPI-U versus using pre-1996 methodology. By 2011, the benefit cut would be $128 per month, or $1536 per year.

In 2001, legislation was introduced that would have mandated the indexing of COLAs to the C-CPI-U (H.R. 2771). TSCL believes similar legislation may be introduced again in this session of Congress. A number of economists have raised questions over the suitability of using this index for COLA calculations. The C-CPI-U does not measure the percentage of change in the cost of goods and services of a market basket. It measures something more intangible — the change in consumer spending behavior when prices go up or down. Also problematic is the fact that final data is only available with a two-year lag time. The government issues initial and interim estimates and revises final data two years later. This raises the questions about whether COLAs would also be subject to annual revisions.

TSCL is strongly opposed to the use of the C-CPI-U to index COLAs. TSCL believes the current COLA understates senior costs already and the C-CPI-U would significantly exacerbate the problem. TSCL supports and lobbies for COLAs to be indexed using the Consumer Price Index for Elderly Consumers (CPI-E). The CPI-E gives greater weight to health care and prescription drug costs and thus is considered a more accurate reflection of senior costs.

Sources: “Federal Reserve Board’s Semiannual Monetary Policy Report,” Testimony of Chairman Alan Greenspan, February 11, 2003. “Consumer Price Index: July 2002,” Bureau of Labor Statistics, August 16, 2002.

To read more about the C-CPI-U, see “New CPI Would Cut COLAs Significantly” at http://www.tscl.org/NewContent/101669.asp and “CPI ‘Improvements’—A COLA Cut Cover-Up?” at http://www.tscl.org/NewContent/101619.asp.

May 2003