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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

Inflation-Indexing Elements in Federal Entitlement Programs

Dawn Nuschler, Coordinator, Specialist in Income Security

April 24, 2013

http://www.fas.org/sgp/crs/misc/R42000.pdf

[full-text, 23 pages]

 

Summary

In recent years, various proposals have been discussed in the context of ways to reduce federal

budget deficits. One of the proposals, for example, is the use of a different measure of consumer

price change to index various provisions of federal programs, including cost-of-living

adjustments (COLAs). For example, under current law, the Social Security COLA is based on the

Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Under the

proposal, the Social Security COLA would be based instead on the Chained Consumer Price

Index for All Urban Consumers (Chained CPI-U or C-CPI-U). Because the goal of the Chained

CPI-U is to better reflect how consumers change their buying habits in response to changes in

prices, supporters of the proposal argue that it is a more accurate measure for computing COLAs

and making other automatic program adjustments. Opponents, however, view the proposal as a

backdoor way of reducing benefits because the Chained CPI-U typically has risen more slowly

than either the CPI-W or the traditional CPI-U. Some observers point out that the Chained CPI-U

is published as a preliminary value that is subject to revision over a period of up to two years, and

that it may not accurately reflect the cost of living for certain groups, such as the elderly

population.

 

The current discussion of a potential change in the way the Social Security COLA is computed

raises questions about indexing in other federal entitlement programs. The purpose of this report

is to identify key indexing elements in major federal entitlement programs under current law and

present the information in a summary table. As shown here, indexing affects more than benefit

levels paid to individuals through COLAs. Indexing also affects, for example, federal payments to

providers and eligibility criteria for some programs. In addition, the report provides a brief

description of the measures of consumer price change used to index various elements of these

programs under current law, as well as the alternative measure of consumer price change (the

Chained CPI-U) that has been proposed for computing Social Security COLAs and making

inflation adjustments to other federal programs.

 

This report does not evaluate the best measure of consumer price change for making automatic

inflation adjustments in federal entitlement programs. In addition, broader issues, such as the

technical aspects of different measures of consumer price change, potential implications of using

an alternative measure of price change to index various elements of major federal entitlement

programs, and the indexing of other items (for example, the federal poverty threshold and

parameters of the tax code) are beyond the scope of this report.

 

For technical information on how the Chained CPI-U is constructed and reported by the U.S.

Bureau of Labor Statistics, see CRS Report RL32293, The Chained Consumer Price Index: What

Is It and Would It Be Appropriate for Cost-of-Living Adjustments?, by Julie M. Whittaker. For

information on how Social Security benefits could be affected by using the Chained CPI-U to

compute annual COLAs, see CRS Report R42086, Using a Different Cost-of-Living Measure for

Social Security Beneficiaries: Some Policy Considerations, by Christine Scott.

 

Contents

Introduction ...................................................................................................................................... 1

Current and Proposed Measures of Consumer Price Change .......................................................... 2

Policy Considerations ...................................................................................................................... 3

For Additional Reading .................................................................................................................. 19

 

Tables

Table 1. Key Inflation-Indexing Elements in Major Federal Entitlement Programs ....................... 6

 

Contacts

Author Contact Information........................................................................................................... 20

Acknowledgments ......................................................................................................................... 20

 

 

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