Letter to Representative Walz on Chained CPI Comments

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Written by Dean Baker   
Wednesday, 13 July 2011 11:15

The Honorable Tim Walz
1722 Longworth House Office Building
Washington, DC 20515

Dear Representative Walz:

During an interview about the proposal to use the Chained CPI to evaluate cost-of-living adjustments for Social Security benefits in the context of negotiations over the debt ceiling, you said that it is a “positive sign” that President 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”. You also said that you, “would like to think that there’s a fairly large number of [House Democrats] that would be willing to look” at the idea.

It is not clear that the Chained CPI is more accurate than the current measure. The Bureau of Labor Statistics (BLS) has found that an experimental elderly index (CPI-E), that tracks the consumption patterns of people over age 62, actually shows a higher rate of inflation for the elderly than the CPI currently used for adjusting Social Security benefits.

While the CPI-E is not a full index since it does not look at the specific items bought by the elderly and the specific outlets they use for their shopping, there is no reason why BLS could not construct a full CPI-E. If the concern is having an accurate cost of living adjustment then it would seem that you should support having Congress instruct BLS to construct a full CPI-E. For my part, I don’t know whether this measure would show a higher or lower rate of inflation than the current CPI used for indexing benefits, but it would be a more accurate measure.

As it stands, switching to a Chained CPI would undoubtedly mean a cut in scheduled benefits, regardless of whether or not it involves a more accurate cost of living adjustment. Using this measure of the CPI would reduce benefits for retirees by 3 percent in 10 years, 6 percent in 20 years and 9 percent in 30 years. We know that the vast majority of retirees are struggling to make ends meet already. Retirees are not the people responsible for wrecking the country’s economy. Social Security benefit cuts of this magnitude seem like a major step in the wrong direction.

I hope that you will have the time to review the indexation issue more carefully. I would be happy to provide you additional background on the topic if it would be helpful.