What's A 'Chained' CPI?

Originally published on July 20, 2011 7:05 pm
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MICHELE NORRIS, host: We're going to focus now on one of the many deficit reduction measures currently being debated by lawmakers. It involves changing the way federal benefits and certain provisions of the tax code are adjusted for inflation. The proposal, stop using the consumer price index, the CPI, and start using something called the chained CPI.

Robert Greenstein is executive director of the Center for Budget and Policy Priorities. He joins me now to do some heavy lifting here for us to help us understand something that can be quite difficult to understand. Thanks so much for being with us.

Mr. ROBERT GREENSTEIN (Center on Budget and Policy Priorities): My pleasure.

NORRIS: Could you, in one sentence, explain to us exactly what the CPI is and how a chained CPI is different from a regular CPI?

Mr. GREENSTEIN: The regular CPI measures the costs each month of a market basket of items that average Americans may purchase each month and so it tells us how much prices are rising, what the inflation rate is. The chained CPI is identical, really, to the regular CPI in all respects except one. It includes an adjustment so that if, for example, beef prices rise much faster than chicken prices, and consumers, as a result, buy less beef and more chicken, it picks up the switching from the beef to the chicken, which makes their total costs for the month rise a little less quickly than if you assumed they continued to buy the same amount of beef and the same amount of chicken as before.

NORRIS: So how would having a fuller and more accurate set of adjustments help the government save money?

MR. GREENSTEIN: It helps the government save money in two ways. All programs that provide an annual cost of living adjustment in their benefits, from Social Security to federal retirement programs, some veterans programs, they would now have their benefits adjusted from year to year by using the chained CPI. And on average, benefits would rise about one-quarter of one percentage point more slowly per year.

NORRIS: So if it bring in a little less in benefits or if it doles out it a little less in benefits, let's take a benefit that people might have an easy time understanding. How big a cut, for instance, in a Social Security benefit might we be talking about?

Mr. GREENSTEIN: Well, let's see. So if you had $1,000 a month Social Security check, instead of someone's $1,000 a month check going to $1,030, it goes to $1,027.50. I think the nub of the issue is the following: Analysts agree that overall the chained CPI is a more accurate measure of inflation than the regular CPI. And whether it's in Social Security or any other program or in the tax code, we should adjust for inflation, we shouldn't over-adjust.

NORRIS: If using the chained CPI is such an easy way to save money, potentially savings of up to $500 billion over 10 years, why are they just talking about the switch now? Why isn't this something that has been debated or even adopted earlier?

Mr. GREENSTEIN: This is a very controversial change. You can view it as this is not a benefit cut, this is not a tax increase. We say we want to adjust for inflation. Let's use the most accurate measure of inflation.

Or you can say, well, relative to current law, this would be lower benefits in Social Security and higher taxes. So it either looks non-controversial or it touches all the third rails at the same time.

NORRIS: Robert Greenstein is executive director of the Center for Budget and Policy Priorities. Mr. Greenstein, thank you very much for speaking with us.

Mr. GREENSTEIN: My pleasure. Transcript provided by NPR, Copyright NPR.