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Wednesday, September 21, 2011

Inflation-Indexing Elements in Federal Entitlement Programs

Dawn Nuschler, Coordinator
Specialist in Income Security

In recent months, 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. Because the Chained CPI-U typically has risen more slowly than either the CPI-W or the “regular” CPI-U, however, opponents view the proposal as a backdoor way of reducing benefits. Some observers point out that the Chained CPI-U is published as a preliminary value that is subject to revision over a period of more than 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.

Date of Report: September 1
3, 2011
Number of Pages:
Order Number: R
Price: $29.95

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