Senators Eager to 'Fix' Cost-of-Living Index

Bipartisan momentum is building in the United States Senate for adjusting the way inflation is measured. The change could cut the budget deficit by about $60 billion in 2002.

But pensioners would pay for the budget savings in slower-rising Social Security benefits. And it would cost taxpayers billions.

Economist Barry Bosworth calls the plan "deficit reduction by immaculate conception." Congress would appoint a new commission to suggest a smaller annual adjustment of pensions and taxes to account for inflation. The politicians could duck any blame for the results - lower pensions and higher taxes.

The plan is emerging from the Senate Finance Committee, which on Tuesday held hearings on the Dec. 4 report of an advisory panel on the consumer price index. The panel, headed by Michael Boskin, the former top economic adviser to President Bush, held that the CPI exaggerates the rise in the true cost of living by 1.1 percentage points a year.

"Congress and the president must decide whether they wish to continue the widespread overindexing of various federal spending programs and features of the tax code," the panel wrote.

The commission also suggested creation of a "permanent (rotating) independent committee or commission of experts" to review the accuracy of the CPI every three years or so.

Federal Reserve chairman Alan Greenspan, testifying to the Senate committee Jan. 30, took that proposal a step further. He suggested a new independent commission actually set cost-of-living adjustments for federal receipts and outlays each year. Martin Feldstein, who was President Reagan's top economic adviser, echoed Mr. Greenspan at this week's hearings by saying the proposed committee should recommend an "appropriate" inflation adjustment factor through "informed judgment." This adjustment would be outside any made to the CPI by the Bureau of Labor Statistics (BLS) through its normal "rigorous statistical methods."

"I never saw a group of guys so eager," says Mr. Bosworth of the senators in attendance at the hearing. A special CPI adjustment, the Brookings Institution economist says, would save Congress from making politically awkward cuts in popular programs. The chairman of the committee, Sen. William Roth (R.), of Delaware, and the ranking Democrat, Sen. Daniel Patrick Moynihan, of New York, last week introduced a sense-of-the-Senate resolution that urges an accurate cost-of-living index. Staffers say it is rapidly picking up cosponsors in both parties.

Bosworth says any economist joining the proposed commission would have to have "illusions of grandeur" to believe that his or her "informed judgment" would be any better than that of a full-time housewife in deciding whether the CPI did not cover some improvement in the quality of a product or service - or, on the other hand, a deterioration in shopping environment.

The hearings produced one surprise for some experts: BLS commissioner Katharine Abraham said adjustments to account for quality improvements in 1995 reduced the CPI increase by 2.5 percentage points - a huge amount not mentioned in the Boskin report. To Joel Popkin, a Washington economist who started the price research division at BLS in 1971 and is now a consultant, that casts much doubt on the Boskin estimate of CPI bias. In a report for the American Association of Retired Persons, he says the Boskin commission conclusions are "not convincing."

President Clinton's new budget proposes an extra $2.1 million in fiscal year 1998 and $8 million or so in fiscal year 1999 to speed up various BLS plans to improve its price statistics. Some measures, such as a new "basket" of products and services for the CPI, are already scheduled to come into place in early 1998.

The budget did not suggest any change in the CPI outside those worked out by technicians at the BLS. Since then, however, administration officials have hinted that if Congress passes such a measure, the president would not veto it.

Whether a non-BLS change in cost-of-living indexation will survive in the House of Representatives remains a question. Opponents probably will point to its effect on older pensioners. Starting Social Security pensions are indexed to wages, not the CPI. So a new pensioner does relatively well financially. If the CPI adjustment is cut by one percentage point a year, it will cost the average pensioner $1,200 a year by his or her 20th retirement year, Bosworth reckons. That, he notes, can be a lot of money for older pensioners, 18 percent of whom are already poor.