Today, U.S. Senator John Barrasso (R-Wyo.) spoke about how a more accurate measure of inflation, specifically the chained Consumer Price Index (CPI), could help slow entitlement growth and protect Social Security and Medicare for future generations.
Excerpts of his remarks are below:
“As the deadline nears, the fiscal cliff has caused a lot of concern and a lot of uncertainty around the country. And it appears that too many people in Washington just aren’t serious about real solutions to get us back on solid economic ground.
“The White House and Democrats in the Senate are still not focused on spending cuts. They continue ignoring the real drivers of Washington’s debt.
“We know what they are. They’re out-of-control entitlement programs: Social Security, Medicare, and Medicaid.
“Until we find a way to save and strengthen these programs, no amount of tax revenue will be able match the increase in entitlement spending.
“According to the latest numbers from the Congressional Budget Office, the problem is actually getting worse.
“In its Monthly Budget Review for December, the Congressional Budget Office said the budget deficit for just the first two months of this fiscal year was already $292 billion.
“And when you take a look at that and compare this pace, well we will record our fifth straight year of a trillion dollar deficit.
“In just October and November alone, which are the first two months this fiscal year, we’re already nearly $300 billion in the red.
“Total outlays for those two months were $638 billion.
“Now that’s an increase of almost four percent over the same period a year ago. This increase in spending is much faster than the growth that we’re seeing in our economy.
“Defense spending is actually down about two percent from the first two months of last year. Well that may be the lone bright spot in the CBO’s numbers.
“The problem is, entitlement spending is growing even faster than the rest of government.
“Social Security spending is up 6.8 percent. Medicare is up 8.1 percent. Medicaid is up over 9 percent compared to last year. Those are huge increases in just one year, and they point straight to the problem we face.
“Those three programs—by themselves—account for 43 percent of all Washington spending for the first two months of this fiscal year.
“Some Democrats say that we can’t take steps to save and strengthen these important programs for future generations.
“They say we can’t even discuss fixing this out-of-control spending as part of the fiscal cliff negotiations. Well that’s unrealistic, and it’s unsustainable.
“Without reform, we’re facing the kinds of increases that we see on this chart—but getting worse next month, and the month after that, and then again beyond.
“Without reform, it will keep getting worse, until we drive our economy into the ground, just trying to pay for these programs.
“Now there is a potential solution—one potential solution, or at least something that would help – would be to adjust how we calculate entitlement benefits for inflation.
“As it stands now, the Bureau of Labor Statistics calculates two different versions of what’s called the Consumer Price Index.
“Both of these assume that a consumer buys a certain basket of goods, and then they track the total cost of this basket. A family buys a certain amount of much gasoline, and so much milk, so many muffins to have for breakfast and so on.
“Well, the first measure is called the CPI-U, is what we consider the headline measure—it’s what you read in the papers. It looks at what all urban consumers spend on that market basket of goods. It’s a number we use to index the tax brackets for inflation.
“The second way that they measure the CPI is called the CPI-W. That includes urban wage earners, the ‘w’ is for wage earners, not all consumers, and it also includes clerical workers and a few other professions.
“So it excludes anyone who is unemployed, who’s retired, who’s self-employed, and many other occupations. This is what the government uses for the cost of living adjustments to federal benefits, like Social Security.
“So here you have one that they use to calculate the CPI for tax purposes and the tax brackets. And the other different is for what they use for social security benefits.
“Both of these two systems have several problems, and they both overestimate inflation.
“First, they assume that consumers purchase the exact same basket of goods, regardless of what happens to prices.
“So if the price of something like muffins goes up, the CPI doesn’t account for some consumers who will switch to toast, or having something else for breakfast.
“All American families understand that people change their behavior when prices change. Our understanding of inflation should take that into account.
“Another problem is that these versions of CPI can’t easily deal with the introduction of new products into the market.
“So how does something like the iPod affect consumer spending? How do we account for that when the iPod wasn’t in the market basket of goods before?
“At what point do you start including cell phone bills or internet access into a family’s monthly expenses? It’s not happening now.
“So we’ve got these two different ways to measure inflation, and they both have multiple flaws.
“As I said, the flaws tend to overestimate the inflation that people actually experience when they go to the store and they pay their bills each month.
“You can see how this could be a problem over time. Now, when the government increases what it pays based on an exaggerated inflation adjustment, the impact continues to accelerate.
“If we give someone an extra dollar to make up for inflation, but their expenses only went up 75 cents, well pretty soon all those quarters add up. It’s bad fiscal policy, and we actually can’t afford it anymore.
“The cost of living adjustment should track as closely as possible to the actual cost of living. To address those flaws, what the Bureau of Labor Statistics has done is actually come up with a new and an improved measure for inflation.
“It’s called chained CPI, and it accounts for those changes in consumer choices and for new products and new technology.
“If we used this version of CPI to adjust federal benefits and tax brackets, CBO estimates that we would actually reduce the deficit by $200 billion over the next 10 years. That’s the benefit of not overcompensating for inflation.
“The savings would be small at first, but over time they would grow—until 10 years from now; we would have saved more than $200 billion. The savings get even bigger beyond the 10 years shown here on the chart, and that’s because of compounding.
“Now, with budget deficits of a trillion dollars and more this year, last year, the year before, five years in a row, this one change to the inflation index, well it won’t wipe out the deficit on its own. But it’s a start—and it is something we can do now, and that will pay big dividends down the road.
“Of course, this isn’t the only option. There are other ways to slow the increase in Social Security, and make sure it’s still around to take care of seniors in the future. We need to do something.
“Setting the cost of living adjustment using chained CPI is worth considering. Now, even some Democrats have been open to this idea.
“According to Bob Woodward’s book The Price of Politics, the White House was willing to look at changing the CPI as part of the so-called grand bargain last year. The Simpson-Bowles commission included it as one of their solutions.
“The President himself reportedly had a version of chained-CPI in his latest offer on the fiscal cliff.
“That’s progress. It shows that some Democrats are open to serious ideas and real solutions. Because we need to do something to relieve the burden of Washington’s crushing debt. This is something to consider.
“More revenue is going to have to be a part of the solution, and Republicans have said so. Substantial cuts in spending must be part of the answer as well.
“Washington does not have a revenue problem, it has a spending problem. That problem is centered on entitlement programs that are growing far too quickly.
“Switching to the chained CPI is a reasonable first step we could take now to start to rein in Washington’s out-of-control spending so that we can save and protect Social Security and Medicare for generations to come.”