Calculating the real costs of living.
In
They are inflation shelters for 70 million individuals receiving federal payments that include Social Security, military and civilian pensions, veterans' benefits, and food stamps.
The adjustments also affect the cost of school lunches for 24 million children.
Since 1985, an inflation-adjustment factor has also been applied to federal
income taxes, which represent 45 percent of all revenues collected by the
Because about $450 billion in current expenditures are subject to continuing increases via cost-of-living adjustments, the formula for making these adjustments is, not surprisingly, a concern for a Congress committed balanced federal bud get by fiscal 2002. That plan anticipates COLA modifications that take effect in 1999 and contribute $19.5 billion to the savings needed to eliminate the deficit.
This broad range of fiscal activity rests on one of the most familiar of all government statistics, the Consumer Price Index. This number- -the CPI--is reported monthly and is the official expression of what is generally referred to as "inflation."
The index measures price changes of selected goods and services that include the major categories of housing, food, transportation, clothing, and medical care, plus a wide range of subcategories extending to "oranges, including tangerines" and "indoor plants and cut flowers." The spending components are weighted to reflect their relative importance in the mix of consumer purchases.
Given its massive power, the CPI could justly be expected to reflect a high degree of accuracy It does not, however. The way the federal government measures living costs has come under heavy attack in recent years, and there are increasing demands that it be made more realistic.
There is an "important distinction between the CPI and a true measure of the cost of living," says Alan Greenspan, chairman of the board of governors of the Federal Reserve System, which is vitally concerned with trends in inflation.
Even the Bureau of Labor Statistics, which compiles the CPI, acknowledges its limitations, stating, "The CPI is not a complete measure of price change." The bureau explains that the index may not reflect all price movements for all sectors of the population, such as urban compared with nonurban areas or the elderly compared with other demographic groups.
Greenspan notes that the current CPI is based on 1982-1984 spending patterns and might not fully reflect recent trends, such as the proliferation of discount retail outlets and technology-based improvements in medical care. "Given the perpetual advance of knowledge and technology," he says, there is "a tendency for the quality of goods and services to rise over time in a manner that is difficult to define and measure."
Change in the CPI calculation is assured. The GOP balanced-budget plan assumes that the new inflation measure will trim the annual CPI by 0.2 percentage points. The GOP assumption of CPI-related savings beginning in 1999 is geared to the BLS schedule for its next revision.
The budget impact of the new BLS version is uncertain at this point. Other initiatives may be necessary
Fed Chairman Greenspan has suggested creation of an independent commission to determine inflation factors for both federal outlays and revenues. This panel, he says, could consider the use of targeted COLAS that would reflect the buying patterns of specific beneficiary groups.
On the other hand, some opponents of change argue that scaling back the inflation protection for income-tax calculations would amount to a tax increase.
Whatever the outcome, experts agree that the CPI is receiving the hard scrutiny it has long needed.
Gray, Robert T., Calculating the real
costs of living. (measuring inflation)(Column). Vol. 83, Nation's Business,