What the Chained CPI Debate Tells Us About the Politics of Entitlement Reform

If you're following the fiscal cliff negotiations, you've probably heard about the plan to change the way Social Security calculates its benefit payments by using the inflation measure known as "chained CPI" rather than the current CPI (consumer price index) measure.

There argument over the change goes roughly as follows: Supporters say we should switch to chained CPI because it is a better, more accurate measure of inflation, and would save money over time. The opposition says in return that switching to chained CPI would represent a cut in Social Security benefits.

Many economists on both the left and the right consider chained CPI a more accurate gauge of the cost of living. Right now, Social Security's benefits (as well as federal pensions and military benefits) are indexed to inflation measured by looking at a fixed basket of goods, measured on a monthly basis. But here's the thing: When certain goods grow more expensive, consumers don't necessarily just continue to shell out more. Instead, they switch to cheaper, mostly equivalent goods. What chained CPI does, then, is attempt to account for the way consumers switch to cheaper goods by looking at purchasing changes over time and linking — or "chaining" — two consecutive months of data together.

As the Congressional Budget Office noted in a 2010 report, measuring chained CPI is actually kind of hard for a variety of technical reasons, and benefits would end up indexed to a preliminary estimate of chained CPI. Still, even if it's a bit imprecise, the overall effect would be to calculate increases in Social Security payouts in way that more accurately reflects consumer behavior. And over time, it would restrain the growth of Social Security, reducing planned spending on the program by about $145 billion over a decade, and more over time.

Which is precisely why Social Security's defenders are concerned. They argue that the potential savings constitute a benefit cut. That's not quite right: Instead, benefits would simply grow somewhat more slowly than if we stuck with the current inflation measure. Over the next decade, chained CPI would grow 0.25 points more slowly than the current inflation measure, according to the CBO.

The gravitation toward chained CPI, and its prominent place in the fiscal cliff negotiations, tells us a lot about why budget reform is so hard. The long term budget problem is, more than anything, an entitlement spending growth problem. And while Social Security is not as big of a problem as Medicare, it's still a contributing factor. Yet restraining the growth of our big entitlements is so unpopular that politicians have had to resort to technical tweaks that aren't widely understood. And even then, those tweaks, designed to modestly slow spending growth, are decried as cuts.