Refiguring Cost-of-living Seems A Wise, Prudent Step

Staying Ahead

April 21, 1997|By Jane Bryant Quinn | Jane Bryant Quinn,WASHINGTON POST WRITERS GROUP

CONGRESS and the White House are having second thoughts about changing the way the government figures cost-of-living increases. Many programs are indexed to the Consumer Price Index (CPI), but most experts think that the CPI overstates the real rise in the cost of living.

By revising the way it indexes payments, the government could produce a quick budget fix. It would nip a few dollars out of almost everyone's pocket but ease the pressure on Medicare and other popular programs.

A couple of months ago, you heard a lot of brave talk about forming a bipartisan commission to figure out how to proceed. But the moment appears to have passed. No one dares take a step that might cost a voter even $1 more.

Most of us are indexed to the CPI in one way or another. If the reported CPI is too high, we're getting a bit of money we shouldn't.

Indexing is supposed to keep us even -- not give us a raise.

The CPI is computed by the Bureau of Labor Statistics (BLS) and is as much an art as a science. The BLS has been steadily improving its data; the CPI is probably closer to the cost of living than it was 10 years ago.

But incremental change comes slowly.

Reformers want Congress to reduce all indexed payments by a specified percentage.

The most recent report on the CPI, headed by economist Michael Boskin of the Hoover Institution at Stanford University, estimates that it overstates the average cost of living by 1.1 percentage points a year (with a range of 0.8 percent to 1.6 percent).

An earlier study by the Congressional Budget Office put the overstatement at 0.2 to 0.8 percentage points.

If Congress cut, say, 0.5 percentage points from the cost-of-living adjustment, here's what would happen:

Social Security payments would be a little bit lower. If your monthly benefit came to $745 last year, your check is projected to rise this year to $768. A reduction of 0.5 percent would leave you with $765 -- a loss of $3 a month, $36 for the year.

Other federal payments would similarly be shaved: federal and military pensions, indexed veterans benefits and Supplemental Security Income.

The official poverty line would rise a tad more slowly, as would certain poverty programs. For example, the amount of food stamps an eligible person gets is linked to the level of the CPI.

Income-tax payments would rise a speck. Personal exemptions, income-tax brackets, the standard deduction and the earned income credit are all indexed to inflation. If they go up more slowly, a little bit more of your income would be subject to tax.

Nothing might change for the 1.2 million workers whose wage contracts carry cost-of-living clauses. If the CPI itself didn't change, private contracts linked to it wouldn't change, either. A vote in Congress would affect only federal payments.

All the federal changes would be small. But taken together (and assuming no compensating rise in federal spending), they could trim the deficit by $14 billion in 2000 and $51 billion in 2005, according to the Congressional Budget Office.

Why suggest a cut of 0.5 percent rather than 1.1 percent, as the Boskin report would imply? Because although most economists (not all) think the CPI is overstated, they disagree as to how much.

That's because part of the CPI amounts to a value judgment. For example, if prices go up because an item's quality improves, the BLS doesn't count that as an increase. But people can differ over what's a quality improvement.

Charles Lieberman, chief economist of Chase Securities in New York City, jokes that when an airline stops serving meals and passes out bags of pretzels instead, that's a quality improvement.

His joke isn't far from the real-life decisions the BLS has to make.

Take air bags. When they were added to cars, their cost wasn't counted because you got something for your money. You and I, however, would say that air bags put car prices up.

Most increases in health-insurance premiums also aren't picked up as price increases, Dean Baker of the Economic Policy Institute in Washington told my associate, Kate O'Brien Ahlers.

Baker thinks that the CPI may be understated, especially for older people.

With such broad disagreement, cutting cost-of-living adjustments is obviously a judgment call. But it strikes me as wiser to take a few bucks from each of us rather than balance the budget by slashing valuable programs that the public wants.

Pub Date: 4/21/97

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.