The Mythology of Chained CPI

Josh Barro is the lead writer for the Ticker, Bloomberg View's blog on economics, finance and politics. His primary areas of interest include tax and fiscal policy, state and local government, and planning and land use.
Read More.
a | A

On Christmas, Ruth Marcus wrote an opinion piece for the Washington Post saying we should link Social Security benefits to the chained consumer price index. The piece's headline says this move, which would cause benefits to grow more slowly, is "a cost savings everyone should endorse."

Marcus explains, convincingly, why regular CPI overstates inflation and chained CPI is a more accurate measure. Then she offers this head-scratcher:

"If chained CPI is a more accurate inflation measure, benefit checks will be smaller than they otherwise would have been. But the purchasing power of those benefits will remain the same."

I suppose Marcus means that, if Social Security benefits rise with chained CPI, their purchasing power will remain the same from year to year. But their purchasing power won't be the same as it would have been without reform -- it will be lower, which is why many people won't endorse this reform.

This is the key point about chained CPI, often glossed over by its advocates. Adopting it is just another way to cut Social Security benefits. So it's only a good idea if cutting Social Security benefits is a good idea.

Now, you could argue that Social Security benefits have been too generous all along, which is why growing them more slowly is a good idea. Or you could argue that the long-term fiscal gap requires cuts in many worthwhile programs, and Social Security is one of the best options.

As it happens, I don't think either of those claims is true. I think Social Security is one of the best values among federal programs and that the U.S. faces a retirement-savings crisis that will be exacerbated if we cut old-age benefits. I think we should cut elsewhere.

You might disagree. But that's the debate we need to have. The claim that adopting chained CPI is a technical improvement that "everyone" should get behind is incorrect.

(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.