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Adjusting The Cost Of Living Adjustment

News: Analysis & Commentary: THE ECONOMY


Congressional budget-cutters eye a gauge to replace the CPI

Throughout last year's bitter budget battles, negotiators kept one big deficit-cutting plan simmering on the back burner: trimming annual cost-of-living adjustments that boost Social Security benefits and protect taxpayers from inflationary tax hikes. Economists, from Federal Reserve Chairman Alan Greenspan on down, argued that the consumer price index overstates price hikes faced by the average household. ReducingK COLAs would slash the budget by billions--if Congress and the White House would face the political risks.

They didn't. But as President Clinton and GOP leaders prepare for 1997's budget bout, COLAs are moving to center stage. On Dec. 4, a panel of economists is scheduled to urge Congress to replace the CPI with a new index for adjusting retirement benefits and taxes. The panel, led by Stanford University economist Michael J. Boskin, will back up its earlier conclusion that the CPI overstates inflation by about one point. If inflation is now 2% instead of the official 3%, retirees are collecting 50% more than they need to maintain their living standard.

TRUST-FUND BOOST. Budget hawks will applaud the Boskin group's findings. Cutting COLAs and tax-bracket adjustments by one point a year reaps $195 billion in savings over the next five years (chart). "We're absolutely going to insist on adjusting COLAs," says Representative Charles W. Stenholm (D-Tex.), a leader of moderate Democrats who last year proposed a budget cutting COLAs by a half-point. The Senate fell just five votes short of passing a similar plan.

Retirees aren't likely to find the idea so appealing. A one-point drop in COLAs would cost a beneficiary who receives $619 a month about $74 in the first year--with the gap growing each year. Baby boomers have even more to lose: If benefit formulas are changed accordingly, their checks will be hit by 25 or 30 years of slower growth.

What's bad for retirees, though, is good for Social Security's long-term health. A new index that grows more slowly could add 20 years to the life of the Social Security trust fund, which is now projected to run out of cash in 2029. Such a move would eliminate two-thirds of Social Security's long-run deficit. Both radical reformers and defenders of the current system might find that appealing.

GOP leaders, however, aren't thirsting for a COLA plan just yet. Having taken a beating over efforts to slow Medicare spending, Republicans aren't eager to lead with a plan that President Clinton could portray as a backdoor cut in Social Security. And there's no sign that Clinton is ready to offer them cover. "People are going to think: `They're creating a new index to screw us,"' says one Clinton aide.

The Boskin panel's call for a new COLA index tries to reduce the risk of political meddling. The Bureau of Labor Statistics would gather prices to calculate the CPI every month. The new measure, published perhaps only once a year, would use the same data--but run them through a different formula that the panel says would more closely reflect consumers' living costs.

RETROACTIVE. The biggest difference: While the CPI is based on a fixed basket of goods and services that turns over only once in five years, the goods priced in the new cost-of-living index would be adjusted each year based on actual purchasing patterns. That means the index would reflect substitutions consumers make as prices shift--buying more cornflakes, say, as oatmeal becomes more expensive. And unlike the CPI, the new index might be revised retroactively--so that an overestimate in one year's cost-of-living hike might lead to a smaller increase the next year.

Critics contend the new index will be no better than the old one. "If they wanted a true COLA index, they would include lots of things--like crime or taxes--that affect maintaining your quality of life," says lobbyist Evelyn M. Morton of the American Association of Retired Persons. Labor unions, which have COLAs in a fifth of their contracts, charge that Boskin's panel exaggerates the CPI's errors to reach a preordained conclusion that COLAs must be cut.

Boskin, who was President Bush's chief economist, denies that his agenda includes cutting the budget--or Social Security. "This is a technical commission to look at the CPI's accuracy," he says. But when a statistic has as much pocketbook impact as the CPI, any tinkering at all will require political courage.By Mike McNamee in WashingtonReturn to top

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