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Inflation: Will lawmakers change the way it’s officially measured?

A proposal to cut Social Security costs and raise tax revenue by changing the way the government measures inflation ran into opposition from Democrats and Republicans.

President Barack Obama and lawmakers, searching for ways to reduce the deficit, are discussing using an alternative yardstick for gauging inflation to calculate annual cost-of- living adjustments for millions of Americans, according to congressional aides.

The idea of switching to the “chained consumer price index” has been endorsed by economists, who say the current inflation measure exaggerates how much prices increase. Yet it’s unpopular with many lawmakers because it could mean cutting Social Security by $112 billion over 10 years while increasing taxes by $60 billion, according to estimates by the Congressional Budget Office and the Joint Committee on Taxation.

“We are not going to balance the budget on the backs of America’s seniors,” House Democratic leader Nancy Pelosi of California said yesterday. Negotiators should “not consider Social Security a piggy bank for giving tax cuts to the wealthiest people in this country.”

Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, expressed concern that the change would amount to a tax increase because the tax code is adjusted for inflation.

“I’m not for raising taxes under any circumstances,” he said. “We’re taxed enough.”

Still ‘Far Apart’

Obama met yesterday with congressional leaders to try to hash out a deficit-reduction plan that would ease passage of a debt-limit increase before Aug. 2, the date when the U.S. Treasury says its borrowing authority will reach its limit.

The president called the meeting “constructive,” though he said the two sides remain “far apart on a wide range of issues.” He said aides would work through the weekend and lawmakers would reconvene July 10 so “the parties will at least know where each other’s bottom lines are and will hopefully be in a position to then start engaging in the hard bargaining that’s necessary.”

Representative Xavier Becerra, speaking yesterday on C- Span, said the chained index idea may be a negotiating tactic.

Obama “has tried many ways to get our Republican colleagues to come to some middle ground and hasn’t succeeded,” said Becerra, a California Democrat who opposes any benefit cuts. “I suspect he’s saying, ‘Look, I’ll put everything on the table, let’s see what sticks.”

‘Zero Appetite’

Representative Jared Polis, a Colorado Democrat, said “there is zero appetite in the Democratic caucus for looking at entitlement programs unless there is substantial revenue on the table.”

White House spokesman Jay Carney downplayed the significance of any changes in Social Security, saying in a statement: “The president has always said that while Social Security is not a major driver of the deficit, we do need to strengthen the program.” He said Obama wants to work with both parties to do that “in a balanced way that preserves the promise of the program and doesn’t slash benefits.”

The idea of altering the measure of inflation — discussed in a series of debt talks led by Vice President Joe Biden and in separate meetings of a bipartisan group of senators known as the Gang of Six — resurfaced this week during a meeting between Treasury Secretary Timothy Geithner and House Democrats, according to a congressional aide. Democrats pressed Geithner on the issue and he didn’t rule it out, according to the aide.

Overstating Price Gains

Social Security and other government benefits, as well as much of the tax code, are automatically adjusted for inflation so Americans don’t fall behind as prices rise. Economists say the government’s inflation measure overstates how quickly prices increase, which means it’s paying too much for annual cost-of- living gains while collecting too little tax revenue. Advocates say the chained CPI measure would be a more accurate gauge.

“I don’t see how anybody can argue against having accurate formulas,” said Senator Mike Crapo, an Idaho Republican who was a member of the Gang of Six.

Democratic Representative Jan Schakowsky of Illinois said the current inflation measure already understates cost-of-living increases facing older Americans because they spend more on medical care. “Seniors get the double whammy — higher health- care costs and deeper benefit cuts,” she said.

Some Democrats Open

The leaders of the Congressional Progressive Caucus lined up against the idea yesterday, sending a letter to Obama demanding Social Security be put off limits, while AFL-CIO President Richard Trumka announced his labor federation’s opposition.

Still, some Democrats said they were open to the idea.

“There is an appetite in the country among all groups to stop the practice of having our children pay our bills,” Representative Robert Andrews of New Jersey told reporters yesterday. “There is a realization that we can’t achieve that objective without real sacrifice by a lot of people, that there is some small group of elites that can pick up the whole tab.”

Representative Tim Walz of Minnesota called the talk about the chained CPI “a positive sign” that Obama “sees it as an opportunity for a grand compromise, one that actually would do what we all want to do, bring some type of stability.”

“It caused a lot of angst” among House Democrats, he told reporters. Still, Walz said he “would like to think there’s a fairly large number of us that would be willing to look” at the idea.

Surveying Shoppers

Inflation is a general rise in the price of goods and services, and the government measures it by surveying thousands of Americans on what they buy and where they shop.

The Bureau of Labor Statistics each month sends 400 price collectors to 26,000 locations in 87 cities to record the prices of breakfast cereal, bus tickets, haircuts, toys, funerals, dental fillings, jewelry and 80,000 other products and services. It uses that information to devise a basket of goods the typical family buys each month in order to track prices.

There is a “pretty widely held” consensus among economists that the bureau’s methodology exaggerates inflation because it doesn’t fully account for the way individuals respond to rising prices, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

Overestimating Inflation

It accounts for those who buy cheaper varieties of wine or steak when those prices rise, though not for those who opt instead for beer or chicken. That means it overestimates inflation, which leads to cost-of-living increases for Social Security beneficiaries, veterans and federal retirees that are bigger than necessary to maintain their purchasing power. It also affects the number of Americans who qualify for food stamps and other aid with eligibility criteria tied to federal poverty guidelines.

In addition, it means that the thresholds at which higher income tax rates begin to apply to individual taxpayers rise faster than necessary to prevent so-called “bracket creep,” which means less tax revenue pouring into the Treasury.

The chained index accounts for the belt-tightening chicken eaters and beer drinkers. Over the past decade, the alternative index has grown more slowly than the current inflation measure by an average 0.3 percentage points a year, the CBO says.

“It’s a no-brainer,” said Marc Goldwein, former associate director of the administration’s deficit commission. “We’re measuring inflation wrong now, and it’s obvious we should measure it right — especially if it’s going to reduce the deficit.”

—Bloomberg