Monday, December 17, 2012

Fiscal Cliff: Chained CPI

by Bill McBride on 12/17/2012 07:32:00 PM

Ezra Klein at the WaPo WonkBlog wrote earlier today: A ‘fiscal cliff’ deal is near: Here are the details

Boehner offered to let tax rates rise for income over $1 million. The White House wanted to let tax rates rise for income over $250,000. The compromise will likely be somewhere in between. More revenue will come from limiting deductions, likely using some variant of the White House’s oft-proposed, oft-rejected idea for limiting itemized deductions to 28 percent. The total revenue raised by the two policies will likely be a bit north of $1 trillion. ...

On the spending side, the Democrats’ headline concession will be accepting chained-CPI, which is to say, accepting a cut to Social Security benefits.
Chained CPI is a relatively new series (started in 2002), and measures inflation at a slightly lower rate than CPI or CPI-W - and over time this would add up both for Social Security payments and also for revenue (tax brackets would increase slower using chained CPI than using currently).

From the BLS: Frequently Asked Questions about the Chained Consumer Price Index for All Urban Consumers (C-CPI-U)

CPI Chained Click on graph for larger image in graph gallery.

The graph shows the year-over-year change in headline CPI, CPI-W, and chained CPI.

There isn't much difference on a year-over-year basis, but notice the blue line is mostly below the other two all the time. Those small differences add up over time as the following table shows.

This table shows the 10 year change in each measure (from Nov 2002 to Nov 2012) and the annualized change over that period. If we were using chained CPI instead of CPI-W over the last 10 years, Social Security benefits would be about 3.6% lower than they are now.

10 Year IncreaseAnnualized
CPI (headline) 27.0%2.42%
CPI-W (current)27.7%2.48%
CPI (chained)24.1%2.19%