At the Cato Institute, Romina Boccia makes the case that the Consumer Price Index is overestimating inflation, and that as a result, taxpayers are paying Social Security recipients too much. She writes:
With most of Washington shut down, the Bureau of Labor Statistics recalled employees to ensure that one statistic was released on time: the consumer price index. The Social Security Administration needed it to calculate next year’s cost-of-living adjustment for retirees and other beneficiaries.
This routine release masks a costly flaw: The CPI figure Social Security uses is outdated, costing taxpayers hundreds of billions of dollars each year. Social Security still relies on a 1970s inflation formula that overstates cost increases and inflates benefit growth—at a projected cost of $204 billion over the next decade, according to the Congressional Budget Office.
The index in question, the consumer price index for urban wage earners and clerical workers, or CPI‑W, reflects the spending habits of only about one-third of Americans and ignores how consumers adapt when prices change. In the real world, when the price of beef rises, people buy more chicken. Economists call that the substitution effect, and the Bureau of Labor Statistics began accounting for it 25 years ago with the chained CPI, or C‑CPI‑U, a more accurate measure of the cost of living.
Congress embraced this modern index when it meant more tax revenue. The 2017 tax law switched the tax code to chained CPI. Tax thresholds are adjusted each year to prevent taxpayers from being pushed into higher tax brackets when their incomes rise at a slower pace than inflation. Because the chained CPI rises more slowly than the unchained CPI, the tax-bracket thresholds increase by smaller amounts than was the case before the change, so more taxpayers pay higher rates. In 2017 the Joint Committee on Taxation estimated this change would result in $134 billion more revenue over 10 years.
Yet when the same index would save money by ensuring that benefit increases most accurately reflect rises in the cost of living, lawmakers suddenly lose enthusiasm for modernization. That’s Washington’s inflation hypocrisy: When the update raises revenue, it’s a technical improvement. When it slows benefit growth, it’s a cut.
Read more here.
