Budget Options
November 20, 2014

Mandatory Spending Option 21

Multiple Budget Functions

Use an Alternative Measure of Inflation to Index Social Security and Other Mandatory Programs

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of dollars 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024
Change in Outlays                        
  Social Security 0 -1.7 -4.1 -6.7 -9.5 -12.5 -15.7 -18.9 -22.1 -25.2 -22.0 -116.4
  Other benefit programs with COLAsa 0 -0.6 -1.3 -1.9 -2.7 -3.4 -4.2 -5.2 -5.7 -6.0 -6.4 -31.0
  Effects on SNAP from interactions with COLA programsb 0 * 0.1 0.1 0.2 0.3 0.3 0.4 0.4 0.5 0.5 2.3
  Health programs 0 -0.5 -1.0 -1.5 -2.2 -3.3 -4.2 -5.0 -6.8 -7.3 -5.2 -31.8
  Other federal spendingc 0 * -0.2 -0.4 -0.4 -0.5 -0.6 -0.7 -0.8 -1.1 -1.0 -4.8
    Total 0 -2.8 -6.5 -10.3 -14.6 -19.5 -24.3 -29.4 -35.0 -39.2 -34.2 -181.7
Change in Revenuesd 0 * * * * * * * * * * -0.1
      Net Effect on the Deficit 0 -2.9 -6.5 -10.3 -14.6 -19.5 -24.3 -29.4 -35.0 -39.2 -34.2 -181.6

Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.

Notes: This option would take effect in January 2016. Estimates are relative to CBO’s August 2014 baseline projections.

This estimate does not include the effects of using the chained consumer price index for parameters in the tax code.

COLA = cost-of-living adjustment; SNAP = Supplemental Nutrition Assistance Program; * = between -$50 million and $50 million.

a. Other benefit programs with COLAs include civil service retirement, military retirement, Supplemental Security Income, veterans’ pensions and compensation, and other retirement programs whose COLAs are linked directly to those for Social Security or civil service retirement.

b. The policy change would reduce payments from other federal programs to people who also receive benefits from SNAP. Because SNAP benefits are based on a formula that considers such income, a decrease in those other payments would lead to an increase in SNAP benefits.

c. Other federal spending includes changes to benefits and various aspects (eligibility thresholds, funding levels, and payment rates, for instance) of other federal programs, such as those providing Pell grants and student loans, SNAP, child nutrition programs, and programs (other than health programs) linked to the federal poverty guidelines. (The changes in spending on SNAP included here are those besides the changes in benefits that result from interactions with COLA programs.)

d. The effects on revenues include changes in the revenue portion of refundable tax credits for health insurance purchased through exchanges, as well as other effects on revenues of the Affordable Care Act’s provisions related to insurance coverage.

Cost-of-living adjustments (COLAs) for Social Security and many other parameters of federal programs are currently indexed to increases in the consumer price index (CPI), a measure of overall inflation calculated by the Bureau of Labor Statistics. That agency computes another measure of inflation—the chained CPI—that is designed to account fully for changes in spending patterns and that effectively eliminates a statistical bias that exists in the traditional CPI. This option would use the chained CPI for indexing COLAs for Social Security and parameters of other programs beginning in calendar year 2016. The chained CPI has grown an average of about 0.25 percentage points more slowly per year over the past decade than the traditional CPI has, and the Congressional Budget Office expects that gap to persist. Therefore, the option would reduce federal spending, and savings would grow each year as the effects of the change compounded.

For additional information including discussion of advantages and disadvantages, see the November 2013 version of this option.