A Lower Inflation Rate Could Cost You Proposal to Revise Consumer Price Index Would Cut Benefits, Raise Taxes

Article excerpt

Byline: Mark Le Bien Daily Herald Business Writer

What determines how much you get in Social Security retirement benefits? What tax bracket you're in? And, in some cases, even how much you get paid?

It's the consumer price index, or CPI, a number the federal government uses to calculate inflation.

Now, a Senate-appointed economic panel says the government should change how it calculates the CPI, revising it downward by 1.1 percent every year.

The advisory panel has said the CPI should be scrapped for a more accurate cost-of-living index. The proposed changes would produce nearly $700 billion worth of savings in the federal budget deficit over 10 years, panel members say.

But the savings would come mostly from cutting the annual cost-of-living increases in Social Security and other government programs in which 60 million Americans are beneficiaries.

The suggested change in the CPI sparked a storm of protest last week, with opponents predicting a grim future of retirees and veterans receiving lower government benefits, union workers getting smaller pay hikes and poor families receiving fewer food stamps.

The proposal, if enacted by Congress, could mean a loss of thousands of dollars in the years after retirement for some Social Security recipients, for example.

But perhaps a better way of considering the impact of a lower CPI is by looking backward instead of forward. Simply put, how would some things be different today if Congress had adopted the panel's advice, say, 10 years ago?

Consider the average monthly payment to a retiree under Social Security.

In 1986 the payout was about $480 per month. Through cost of living adjustments pegged to the CPI, the payment rose every year to about $683 per month in 1996.

What if the 1.1 percent revision in the CPI had been in effect during those years?

The payment would have started at $465 and risen annually to about $594 this year.

As of 1996, then, the recipient would have been receiving $89 less per month due to the lower CPI.

That might not look like so much. But the magnitude of the difference between the two payouts becomes more obvious when comparing the total payments over 10 years using the CPI versus using the trimmed down CPI.

Over a decade, the payment came to about $77,400. If the lower CPI had been used it would have been about $70,850.

That's a difference of $6,550.

Some government benefits for veterans provide another, albeit less dramatic, example. …