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Chained CPI’s Diminishing Returns for U.S. Budget

Author: Peter R. Orszag, Adjunct Senior Fellow
April 8, 2013
Bloomberg.com

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News that the White House will propose a new cost-of-living index in the budget it releases this week has brought joy to deficit scolds and consternation to defenders of Social Security.

The measure, called the chained consumer price index, would lower the annual payment increases for Social Security beneficiaries, saving the government money as it lowers the future monthly income of retirees and disabled Americans. The change would also raise revenue over time because it would cause more taxpayers to wind up in higher marginal brackets.

What neither side seems to have noticed, however, is that the difference between the chained CPI and the standard CPI has been diminishing. That means the impact of switching indexes may not be as great as many assume. The change may still be a good idea, but it probably won't matter as much as expected.

A decent guess is that, over the next decade, the effect on the deficit of adopting the chained index would be less than $150 billion. Social Security benefits even 20 years after retirement would be reduced by less than 2 percent. This does not amount to bold long-term deficit reduction. On the other hand, it wouldn't be the end of Social Security as we know it either.

It may lead some people to ask why policy makers should bother -- though I would still support making the shift.

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