Possible CPI changes threaten retirees' pockets

The Bureau of Labor Statistics (BLS) calculates the consumer price index, which is the principal source of information on trends in consumer prices and inflation in the United States, by tracking prices for a fixed "market basket" of goods and services that consumers purchase for day-to-day living. These purchases include food, clothing, shelter, fuels, transportation, medical care and entertainment.

The CPI is used by the federal government and the private sector to increase wages and benefits payments to compensate for eroded consumer purchasing power due to inflation.

In 1997 the federal government adjusted the benefits of 43.6 million Social Security beneficiaries and 21.4 million food stamp recipients because of the growth in consumer prices as reported by the CPI.

In addition, federal tax brackets are adjusted automatically by the CPI to prevent inflation-induced increases in tax rates.

Likewise, the government uses the CPI to adjust the benefits that are paid to federal retirees. When a federal employee retires, his benefits are adjusted each year to conform to changes in the CPI, ensuring that his purchasing power remains constant. If these adjustments did not take place, someone whose purchasing power is reduced by as little as 1 percent a year will suffer a decline in his standard of living of about 15 percent in 10 years. And it would become worse with each passing year.

Fewer Benefits?

Consequently, if changes in the way the CPI is calculated result in a reduction, people who receive benefits payments that are indexed to the CPI will receive fewer benefits, and their standard of living will decline. Unfortunately, that may be about to happen.

There has been much debate surrounding the calculation of the CPI. The Advisory Commission to Study the Consumer Price Index, known as the Boskin Commission, concluded in December 1996 that the fixed "market basket" approach has become less representative of consumer spending over time because it does not take into account consumers' responses to price changes and new consumer choices.

The commission concluded that by not making adjustments to reflect such consumer behavior patterns, the CPI overstates the true cost of living. The commission estimated the size of the overstatement to be 1.1 percentage points per year, and it recommended that the government change the methodology for calculating the CPI. Within the community of professional economists and statisticians, the commission's report has received mixed reactions.

The General Accounting Office recently reviewed the methods used to calculate the CPI and evaluated proposed changes to this methodology (Report No. GAO/T-GGD-98-115; April 29, 1998). To obtain a better perspective on this issue, GAO obtained information on CPI practices in Japan, Italy, Germany, France, Canada and the United Kingdom. All of them track consumer prices through a "market basket" of goods and services and weigh the prices of those items, just as BLS does.

The one difference GAO noted was that these other countries updated their "market basket" more frequently than BLS does. GAO added that more frequent updates to the "market basket" result in a more accurate CPI.

In a pre-emptive strike, BLS officials pretty much ignored GAO's advice and recently announced that, effective January 1999, they will change the CPI to take into account changes in consumer buying practices when the price of an item increases. The change is expected to reduce the annual rate of inflation as reported in the CPI by 0.2 percentage points.

This change, while advocated by the Boskin Commission, was not recommended by GAO. But BLS went ahead with this adjustment on the grounds that the CPI currently fails to consider consumer behavior.

To illustrate the logic behind the BLS action, consider that the CPI now may be calculated to reflect an increase or decrease in, for example, the cost of a particular brand of cereal that has been designated as one of the items included in the "market basket" used by BLS to determine the CPI. Economists argue that in the real world, some consumers may respond to an increase in the cost of a cereal by switching brand names or choosing a different, less expensive type of cereal. They argue that an increase in the cost of a specific brand of cereal should not necessarily cause the CPI to increase.

It is pure sophistry to argue that an increase in the cost of a certain brand of cereal should be ignored because there is a less expensive store brand available. Substituting brands does not always produce a perfect outcome. If you like a particular cereal and do not want another brand, your cost of living is going up any way you slice it. And if you are a federal retiree or Social Security recipient, the value of your retirement benefits is going down.

This is yet another stealth attack on the pocketbooks of federal employees. An adjustment to the CPI is a euphemism for reducing benefits and increasing taxes. It will only generate enough "savings" to enable members of Congress to finance their pet pork-barrel projects. Sadly, most Americans will not even realize that their pockets are being picked by BLS' slight of hand.

Bureaucratus is a retired federal employee who contributes regularly to Federal Computer Week.

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