Federal Savings That Compute : A more accurate formula for Social Security hikes could save billions

The government is scheduled today to let Social Security recipients and military and Civil Service retirees know by how much their monthly checks will increase next year, a figure determined by how the Bureau of Labor Statistics computes the rate of inflation. In years past this has sometimes led to considerable increases, but in virtually every year, so most economists have concluded, it has produced adjustments that err significantly on the high side.

Sen. Daniel Patrick Moynihan (D-N.Y.), one of Social Security’s staunchest friends in Congress, believes that basing cost-of-living adjustments on a more-accurately figured consumer price index could save a staggering $281 billion over the next seven years. That amount exceeds by more than $10 billion the proposed cuts in Medicare costs now before Congress.

What would be a more realistic way to calculate the CPI, which is based on a theoretical basket of regularly purchased goods and services? One reason now seen for the index’s inaccuracy is that it fails to take into account behavioral changes, a familiar example being that a big jump in the price of hamburger might in many cases prompt consumers to switch to some cheaper alternative. Consumers would be spending less than the CPI indicated, but the price of hamburger would still be a part of the CPI.

Earlier this year a panel of private economists estimated that the CPI overstates the rate of inflation by between 0.7% and 2%, with a consensus estimate of 1%. That works out to about $7 a month for the average Social Security recipient, but given that tens of millions of persons get inflation-adjusted checks from the Treasury, the annual windfall runs into the billions.

Moynihan and others who want to adjust the cost-of-living formula would limit raises to 1 percentage point below the CPI rate. That would still give Social Security beneficiaries an annual increase, but no longer a windfall. No rational discussion about deficit-cutting can ignore the savings in this approach. Politically, it takes away nothing that has been legislated. Practically, it is just good economic sense.