14) What does changing the measure of inflation do? And if switching to the chained CPI is about accuracy, why not use CPI-E for Social Security and other age related programs?
The Commission proposed a technical change which would index government programs and the tax code to a more accurate measure of inflation known as the chained CPI. There is a broad consensus among economists that the measure of inflation currently used (CPI) overstates inflation, and that chained CPI is a more accurate measure of cost of living.
Some argue that Social Security and other age-related programs should calculate COLAs using the CPI-E – a measure that attempts to estimate inflation for a market basket that more accurately reflects the items purchased by the elderly.
The chained-CPI has been developed and refined over more than a decade and is now widely accepted as a more accurate measure of inflation. By contrast, the CPI-E is still an experimental measure, and many questions remain about the methodology used in calculating the CPI-E and the accuracy of the measure. In a recent issue brief discussing the options for using alternative measures of inflation for indexing government programs and the tax code, the Congressional Budget Office said that “it is unclear….whether the cost of living actually grows at a faster rate for the elderly than for younger people” and cited research suggesting that the CPI-E may overstate inflation.
In addition, using different measures of inflation for different purposes, such as using the CPI-E to index programs for the elderly while using CPI-U for other programs, would be a policy change that goes well beyond the technical issue of accuracy.