The subject of revising the government's economic statistics is not usually exciting stuff. But when the new study of the consumer price index comes out in early December, it will be dynamite. The report, from a commission of top economists led by Stanford University economist Michael Boskin, will likely say that the official consumer inflation numbers are overstated by a full percentage point or more.
Republicans and Democrats will be tempted to use the CPI overstatement as a politically palatable quick fix for problems with both the budget and Social Security. The annual cost-of-living adjustment for Social Security is tied to the CPI. Lowering the official inflation rate by one percentage point would reduce Social Security outlays and save billions over the next few years. Closing the budget deficit would be much easier. Moreover, a "diet COLA" that uses a 2% rate vs. 3% would significantly reduce the long-term Social Security deficit.
There is a penalty. Reducing the inflation adjustment would impose a much bigger burden on baby boomers than on current retirees. Someone receiving Social Security today would see their payments rise by only 2%, rather than 3%, a small difference. By contrast, a 40-year-old who retires in 2026 will receive payments of about 25% less in real terms. Still, if inflation is really lower than discredited statistics show, the U.S. has no choice but to lower the COLA adjustments. Further, balancing the budget will also lower interest rates and generate higher growth and wealth for the boomers as they move toward retirement. We think it will more than compensate for the lost Social Security income down the road.