Switch to Chained CPI For Mandatory Programs and the Tax Code Would Save Hundreds of Billions

During the recent "fiscal cliff" showdown, Republicans reportedly proposed that the US government switch to using Chained CPI as their new inflation index.

According to sources, the White House was "warming" to the idea of using Chained CPI, but many Democrats opposed it, so the proposal didn't make its way into the final "fiscal cliff" deal.

Plenty of wrangling over the nation's budget lies ahead, so the proposal to switch to using Chained CPI may very well come up again in the near future.

The Republicans proposed using Chained CPI as the new inflation index because it would save the nation a great deal of money.

Just how much money would it save? The CBO tried to answer that question in a recently released report titled "Preliminary Estimate of the Budgetary Effects of Using the Chained CPI for the Mandatory Programs and the Tax Code Starting in 2014". In the CBO's report, they assume that the proposal to use Chained CPI is enacted by October 1st, 2013.

First off, let's let the CBO define Chained CPI:

"The chained CPI is a measure of inflation calculated by the Bureau of Labor Statistics (BLS) that is designed to account fully for changes in spending patterns, such as responses to changes in the prices of different goods."

and

"CBO estimates that the annual update for inflation using the chained CPI-U (the chained consumer price index for all urban consumers) would be 0.25 percentage points less, on average, than the update using the CPI-U (the consumer price index for all urban consumers) or CPI-W (the consumer price index for urban wage earners and clerical workers), based on the historical differences between the chained CPI-U and the CPI-U or CPI-W."

So, for instance, monthly Social Security and Supplemental Security Income (SSI) benefits are paid out to nearly 62 million Americans. These payments are indexed to inflation to make sure that the "benefits are not eroded by inflation". So, if chained CPI was introduced as the method to calculate the cost-of-living adjustment, the government would pay out a slightly smaller cost-of-living adjustment, as the annual update for inflation would be, according to the CBO, about 1/4 of a percentage less.

--

According to the CBO, this single change would cause US deficits to shrink by a total of $340 billion over the course of a 10 year period (2014-2013).

The government would reportedly save $216 billion in direct spending, and they would also raise an additional $123.7 billion in revenues. The reason? More US households would move into higher tax brackets, as they are pegged to inflation.

The breakdown of savings over a ten year period:

Social Security, $127.2 billion
Other COLA (Cost of Living Adjustment) Programs, $37.5 billion
SNAP Interaction (COLA Programs), -$2.8 billion
Health Programs, $28.5 billion
Refundable Tax Credits, $17.9 billion
Other Federal Spending, $7.8 billion

Here is a breakdown of the impact of the change on deficit spending:

On-Budget, $211.5 billion savings
Off-Budget, $128.3 billion savings

Source: CBO.gov - Preliminary Estimate of the Budgetary Effects of Using the Chained CPI for Mandatory Programs and the Tax Code Starting in 2014 (*.pdf)

Filed under: General Knowledge