CPI: An Easy Fix Or A Tough Sell?

By Senior Washington Correspondent Charles Bierbauer

WASHINGTON (Dec. 9) -- It's a simple thing. Three little letters -- CPI. Just one percent. But multiplied by millions and stretched over 10 or 12 years, it could add up to a trillion. Dollars!

What politician might not be seduced to sell his soul for that big a boost towards balancing the federal budget. It may not even be a temptation of fiscal devils. It could be Santa Claus.

"It's a Christmas gift!" says Congressman Bill Thomas, the Republican from California who heads a House subcommittee dealing with health care.

This gift has been brought by five presumably wise men and women -- economists -- commissioned by the Senate Finance Committee to assess a long purported problem with the Consumer Price Index. It's too generous.

The commission concluded CPI is "consistently and substantially overstated," according to chairman Michael Boskin of Stanford.

By 1.1 percent. Big deal? Big deal!

That represents an overestimate of more than one-third in the nation's primary measure of inflation. And that's why the savings could be so huge.

CPI is used to index major government benefit programs -- Social Security, veterans' benefits, government pensions, food stamp allotments. It is also used to set income tax brackets.

Social Security beneficiaries are set to collect an additional 2.9 percent cost-of-living adjustment in January as a result of this year's CPI calculation. By the commission's assessment 1.8 percent might be more accurate.

What would that mean? The average Social Security retiree receives $724 a month this year. The 2.9 percent COLA increase would mean an additional $21 a month in 1997. Knock that back 1.1 percent and you'd knock the increase down by $8 a month or $96 a year.

Small as that may seem, it could put a crimp in fixed income budgets of seniors. But the real impact is over time. It would lower the baseline for each successive year's increase. In 20 years beneficiaries could be about $2,000 a year below where they might now expect Social Security benefits to be.

This is where the big lobbies weigh in.

As the commission was announcing its conclusions in the Finance Committee chambers on Capitol Hill, the American Association of Retired Persons (AARP) and AFL-CIO officials were handing out their objections.

"Proposals to lower the CPI...are nothing more than thinly disguised attempts to cut Social Security and increase taxes," the AARP's statement said. AARP has about 30 million members over age 50.

The unions picked up the argument on behalf of the seniors as well as their own members. Many union contracts have cost-of-living adjustments based on CPI.

"America needs a raise," said AFL-CIO president John Sweeney's statement. "Cooking the books is no substitute."

Cooking? The commission was immediately criticized as being stacked with an anti-CPI bias, including two Harvard economists and Boskin, President Bush's economic adviser.

Sen. Daniel Moynihan, the Finance Committee's ranking Democrat, took umbrage.

"We were looking for the best and we got them and if anybody wants to fight about that, here I am," Moynihan said in mock -- perhaps -- bluster.

Moynihan is as staunch a defender of the government's social safety net as he is a critic of the CPI-based adjustments that make them so expensive.

"We're not trying to cut, we're not trying to raise. We're proposing an accurate count. That's fair government and, I think, good government," the New York Democrat said.

There is a whole arcane statistical science to explain how the government got into this situation. Since 1919, the Bureau of Labor Statistics has calculated the CPI. That now means pricing 95,000 items -- what we eat, where we live, what we wear, how we travel. It is a mammoth, tedious and sometimes untimely process.

What CPI does not do is keep up well with the times and trends. The now highly popular cellular phones will not be added to the index until 1998. Nor does CPI adeptly account for consumer behavior.

"The price of beef goes up, you buy more chicken," says Boskin. "When the price of Delicious apples goes up, you buy Granny Smith."

BLS commissioner Katharine Abraham disputes the Boskin commission's conclusion about the size of CPI's overstatement. BLS itself has corrected its assessments by about a quarter percent. But everyone seems to agree that CPI is not a cost-of-living index and, perhaps, ought not to be used as such. The Boskin commission recommends a new separate index to calculate COLAs.

The technical changes that may be needed are quite apart from the political decisions that must be made.

While Congressional and Clinton administration budget shapers were looking at $200 billion annual deficits a year ago, they are now blessed with a deficit running only a little over $100 billion. It will inevitably go up if they do not make some significant cuts.

It has already gotten difficult to find discretionary spending programs that can be whittled or bludgeoned significantly. The major entitlement programs of Medicare and Medicaid have been highly politicized. Republicans are especially bitter over what they call the "Mediscare" tactics of the past election campaign. Social Security is a separate issue.

The Clinton administration, initially dismissive of the whole idea of adjusting CPI, now says it's a matter for discussion as budget negotiations proceed in the new year.

If CPI is the silver bullet to balance the budget -- and there are those who say it is not and ought to be left alone -- it will take some political calculation as intricate as CPI itself to change it.

The Boskin commission alone will not give the politicians enough cover. Administration officials such as Treasury Secretary Robert Rubin are calling for additional expert input. They are going to need all the expert cover they can get.

The big constituencies which have come to depend on their annual cost-of-living increases will weight in heavily. Clinton, to be sure, owes his second term in some measure to the unions and the elderly voters. No one, by the way, is foolish enough to ask them to pay back any excess adjustments they may have gotten in past years because of CPI's overstatement.

With the Boskin report, the marker has been laid. On Capitol Hill there is substantial support for such an adjustment. In the last session of Congress, 46 Senators -- Republicans and Democrats equally -- voted for one budget proposal with a 0.5 percent CPI reduction.

That proposal was opposed by the White House. If a CPI adjustment is part of the 1998 budget calculation, Clinton will have to sign on.

"I believe it is impossible...without the leadership of the President," says Sen. Pete Domenici, the New Mexico Republican who heads the Senate Budget Committee.

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