New TSCL Study Finds Greenspan Recommendation Would Cut COLAs By 25%

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New TSCL Study Finds Greenspan Recommendation Would Cut COLAs By 25%

Federal Reserve Chairman Alan Greenspan recently recommended that Congress cut Social Security and Medicare. Cutting benefits, he said, is needed to pay for making tax cuts permanent and to reduce the federal deficit. Greenspan, considered by many to be the most influential economist in the nation, recommended that Congress adopt a new “chained” Consumer Price Index (C-CPI-U), saying that the current CPI overstates inflation and thus overpays annual Cost-Of-Living Adjustments (COLAs).

According to a new study for TSCL by Advisor editor Mary Johnson, the chained CPI would have the effect of cutting COLAs by about 25% annually on average, as illustrated in the following chart. The final chained CPI data is available for 2000-2001 only.

TSCL’s Chained CPI Study — COLAS Would Be Cut By 25%

Data for 2001 — for COLA paid effective 1/01/02

Chained Consumer Price Index (C-CPI-U)	2%
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) COLA	2.6%
Consumer Price Index for Elderly Consumers (CPI-E)	3%

Data for 2000— for COLA paid effective 1/01/01

Chained Consumer Price Index (C-CPI-U)	1%
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) COLA	1.4%
Consumer Price Index for Elderly Consumers (CPI-E)	1.8%

Total COLA growth 2001 and 2002 as based on CPI-W	4%
Total growth of COLA if based on C-CPI-U	3% — or 25% LESS

The Bureau of Labor Statistics has already made numerous changes to the CPI in recent years in response to remove what Greenspan calls “the upward bias” from the CPI. In May, The Advisor reported that — according to Congressional Budget Office (CBO) reports, dating back to 1998 — those changes appear to have cut the rate of growth in the CPI for 2005 by about 1.5%. In 1994, Greenspan told a House Budget Committee that the CPI was overstated by as much as 1.5%.

Social Security reform legislation recently introduced by Representative John Kolbe contains a provision directing the Bureau of Labor Statistics to compute a monthly “CPI overstatement” comparing the current CPI against the more slowly growing chained CPI. The so-called “overstatement” amount would then be used to cut COLAs.

TSCL is vigorously fighting this latest Greenspan CPI recommendation and is lobbying hard for Congress to pass legislation that would provide a higher and fairer COLA using a “seniors’ only” index, The Consumers Price Index for Elderly Consumers (CPI-E).

Sources: “Economy: House Committee Clears Bill To Study Revisions In The Consumer Price Index,” Gregg Hitt, The Wall Street Journal, June 24, 1994. Bureau of Labor Statistics data on chained CPI, March 2004. H.R.3821, SEC.7. CPI Overstatement, Representative Jim Kolbe, February 24, 2004.

June 2004