CBO Testifies on Using the Chained CPI to Index Social Security, Other Federal Programs, and the Tax Code for Inflation

Posted by Jeffrey Kling on
April 18, 2013

This morning I testified—before the Subcommittee on Social Security of the House Committee on Ways and Means—on changing the measure of inflation used for indexing Social Security, other programs, and the tax code. My testimony updates a CBO report from 2010 on the same topic.

Social Security law tries to protect beneficiaries from the effects of rising prices by specifying that a beneficiary’s monthly payment be automatically adjusted each year for inflation, as measured by the change in a consumer price index. Similar adjustments occur in many other federal programs and many parts of the tax code. Without such indexing, a rise in the general level of prices would alter the effects of federal policies even in the absence of action by lawmakers.

My statement focused on four questions about indexing:

  • How does the chained consumer price index (CPI) differ from the traditional consumer price index?
  • What would be the budgetary effects of using the chained CPI to make automatic adjustments in Social Security, other federal programs, and the tax code?
  • How could such a change be implemented?
  • How do measures of inflation for specific populations differ from overall measures?

Several of those topics will be discussed in subsequent blog posts today and tomorrow.

Changing the measure of inflation used for indexing is only one of many possible modifications to federal policy for Social Security, other programs, and the tax code. If the Congress wishes to slow the growth of federal spending by constraining outlays for Social Security benefits, or to improve the long-term solvency of the program by making changes to its spending or revenues, many other approaches are possible. Other changes to Social Security benefits and taxes would affect the federal budget and individuals in different ways, as CBO discussed in Social Security Policy Options; possible changes to a broad array of federal tax provisions and spending programs were analyzed by CBO in Reducing the Deficit: Spending and Revenue Options.

Jeffrey Kling is CBO’s Associate Director for Economic Analysis.