My colleague Jeffrey Kling testified before the Subcommittee on Social Security of the House Committee on Ways and Means and described the budgetary effects of switching to the chained consumer price index (CPI) to index benefit programs and the tax code. Cost-of-living adjustments (COLAs) for Social Security benefits and other parameters of many federal programs and the tax code are currently indexed to increases in the traditional CPI, a measure of overall inflation calculated by the Bureau of Labor Statistics (BLS). According to many analysts, however, the CPI overstates increases in the cost of living because it does not fully account for the fact that consumers generally adjust their spending patterns as some prices change relative to other prices and because of a statistical bias related to the limited amount of price data that BLS can collect.

One option for lawmakers would be to link federal benefit programs and tax provisions to another measure of inflation—the chained CPI—that is designed to account fully for changes in spending patterns and that does not have the same statistical bias. The chained CPI grows more slowly than the traditional CPI does: an average of about 0.25 percentage points more slowly per year over the past decade. As a result, using that measure to index benefit programs would reduce federal spending for Social Security, federal employees’ pensions, Medicare, Medicaid, and various other programs. In addition, indexing tax provisions with the chained CPI would increase revenues.

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