Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, September 29, 1995 TAG: 9510030019
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: R.A. ZALDIVAR/KNIGHT-RIDDER/TRIBUNE
DATELINE: WASHINGTON LENGTH: Long
Taxpayers of America, your federal lawmakers have discovered a mind-boggling budget error.
It seems that the government has been paying out too much in Social Security checks and taking in too little in income taxes. Over the years, consistently and methodically, that adds up to hundreds of billions of dollars.
If you're a worker, it means you've been getting a tax cut and you just didn't know it. If you're retired, your fixed income hasn't been quite as fixed as you thought.
The explanation: The official yardstick used annually to adjust retirement benefits and income tax brackets for inflation appears to be faulty.
According to a panel of prestigious economists commissioned by Congress, the government's Consumer Price Index actually overstates inflation by about 1 percentage point a year. (The CPI now is rising by less than 3 percent annually.)
The discovery of inflated inflation may have major implications as Congress and President Clinton grapple with how to balance the federal budget. Changing the CPI already has been compared to a gallon of ice cream sitting in the freezer - pretty tempting.
For example, shaving 1 percentage point from the CPI could reduce the projected deficit in 2005 by $139 billion, a cut of one-third. And that's without driving 85-year-old Medicare beneficiaries into newfangled health-insurance plans.
Of the $139 billion, about $41 billion would come from higher tax collections, $64 billion from reduced benefit payments, and $34 billion from lower interest payments on the national debt.
``Here is real money and a real bipartisan opportunity,'' said Sen. Daniel Patrick Moynihan, D-N.Y., who brought the issue to the forefront this week.
But for all his enthusiasm, Moynihan got a cool reception.
That's because if Congress adjusts the CPI, it would, in effect, break the twin taboos against cutting Social Security and raising taxes. Cost of living adjustments for retirees would be reduced by a few dollars a month, and higher tax brackets would begin to bite at comparatively lower income levels.
``As far as our immediate problem, the rules are such that it does not help us,'' said Senate Finance Committee Chairman William Roth, R-Del.
Senate Majority Leader Bob Dole, R-Kan., held out the hope that Clinton might take a fancy to the idea and give Republicans some political cover to embrace it. White House officials were noncommittal.
An index that's off by a mere 1 percentage point sounds as if it's close enough for government work. However, the real-world effect is much larger, as most federal programs and contracts - not to mention income taxes - are adjusted for inflation.
``The upward bias programs into the federal budget an annual automatic, real increase in indexed benefits and a real tax cut,'' said the commission of economists, led by Stanford's Michael Boskin, who was a senior adviser to former President Bush.
In fact, Boskin's group concluded that if the glitch itself were a program, it would be the fourth largest, behind Social Security, health care and defense.
The miracle of compounding only makes things worse. This year's overpayment gets factored into next year's base. The economists' commission estimated that by overadjusting for inflation, the government will add $634 billion to the national debt in the next decade.
The average person struggling to balance a checkbook may wonder how all this happened. Others might not want to know. Here's a brief explanation:
The consumer price index is not really a comprehensive measure of inflation.
It records the change in price of a selection of goods and services that is supposed to represent what an average consumer would be buying. Labor Department employees actually go out and price items in stores. The Bureau of Labor Statistics then tabulates month-to-month and year-to-year changes.
But the economists' panel said the index has limitations. For instance:
It may not pick up a switch by consumers to less expensive goods.
It might not properly reflect the extent of shopping at discount outlets.
It's slow to incorporate new, high-tech products.
It's too blunt an instrument to measure quality improvements that may be worth more to a consumer.
Where the CPI issue is headed is hard to tell at the moment.
University of Pennsylvania economist Mark Pauly calls it ``a policy wonk smokescreen'' for real decisions that have to be made about the level of taxes and spending. Nonetheless, he agrees that the CPI overstates inflation.
Liberals and conservatives are uneasy. Bruce Vladeck, administrator of Medicare, said he believes the CPI actually may underestimate inflation for elderly people because their medical costs are higher.
Conservatives are suspicious of a political ambush. ``I think Republicans in Congress are worried that Moynihan and other Democrats are setting a trap,'' said economist Dan Mitchell, a budget expert with the Heritage Foundation. ``I'd be worried about the bait-and-switch.''
But Stan Collender, federal budget analyst for the accounting firm of Price Waterhouse, says the temptation to tinker with inflation can only grow in the coming weeks.
``If at the last minute they're looking for additional savings to make their tax cut, this is the kind of thing that has appeal,'' Collender said. ``It's a lot less gimmicky than other things I've seen them do at the last minute.''
by CNB