The CPI: Small Change, Big Savings
The new interest in the CPIÛÓthe consumer price index, the best-known inflation indicatorÛÓ attests to the power of numbers. The CPI is used to adjust government benefits (mainly Social Security) and taxes (the personal exemption, standard deduction and tax brackets). Last week, for example, the government announced that Social Security benefits will rise 2.6 percent in 1996 because the CPI has increased by 2.6 percent in the past year. The idea is to prevent inflation from invisibly eroding benefits or raising taxes. Good. But suppose the CPI overstates inflation. Then benefits will be too high and taxes too low. Presto: a quick way to cut budget deficits. Just dial back the CPI adjustment.</br></br>Comes now a commission of five economists who say the CPI actually does overstate inflation. In a report to the Senate Finance Committee, they conclude that the overstatement is probjibly about one percentage point a year. After then-report, Sen. Daniel Patrick Moynihan (D-N.Y.) enthused on the op-ed page of The Post: ÛÏIf we were to do no more than declare that henceforth the cost of living adjustment will be CPI minus one percentage point, we would save $634 biljion</br></br>Not really. Moynihan's rhetoric may be a reaction to the Clinton administrationÛªs unwillingness to do anything about indexing; but! fids proposal goes too far. I am not arguing that there should be no reduction in the CPI adjustment. There should be; indeed, I have long contended that the CPI exaggerates inflation. Yet once Congress grasps the staggering power of apparently small changes in the index, it may overdo things. The economistsÛª one-percentage-point figure is only an educated guess. If adopted, the practical effect would be to enactÛÓslowly but surelyÛÓa huge benefit reduction and tax increase that falls mostly on those with the lowest incomes.</br></br>Consider first Social Security. In 1995 the average payment for a married couple is $14,160. Increased 3 percent a year, that becomes $16,416 after five years; increased 2 percent annually, the amount is almost $800 less ($15,635). Social Security now provides 40 percent of the income for Americans over 65, but its importance drops as incomes rise. Among the poorest fifth of the elderly, it accounts for about 80 percent of income; among the richest fifth,, jtÛªs only a fifth.</br></br>The tax effects are similar. In 1995; the personal exemption is $2,500 per dependent. If thatÛªs raised 3 percent a year, it becomes $2,890 after five years; at 2 percent, it grows only to $2,760. The lower the exemption, the more money is subject to income tax. The difference ($130) means that, for a family of four, taxable income would be $520 greater after five years. Obviously, that matters more for a family .with $25,000 of income than for one with $250,QO,9-