PRESIDENT OBAMA and Congress have hard choices to make as they try to fashion a long-term budget compromise. But not all of the options are excruciating. One measure would generate large savings over the next decade, split between entitlement spending and revenue increases. The pain it inflicts on beneficiaries and taxpayers would be minimal, widely shared and phased in gradually. And all it would require is a quick administrative tweak.
We refer, as we have before, to the long-standing need for more accurate cost-of-living adjustments to federal benefits and income taxes. Current law indexes Social Security and other federal retirement payments to one estimate of consumer prices; it indexes tax brackets, personal exemptions and the like to another. Both slightly overstate inflation, because they do not allow for the fact that consumers offset price increases in certain goods by switching to cheaper alternatives.
Economists have developed a more realistic measure of inflation, known for obscure reasons as the “chained CPI” (consumer price index), which has averaged a little under 0.3 percentage points less per year than existing measures. That difference doesn’t sound like much, but cost-of-living adjustments work like compound interest: This year’s increase in benefits pyramids on top of all the others that have gone before; ditto for tax adjustments.