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59 IRET Congressional Advisory 1 (1997)

handle is hein.taxfoundation/iretcgadv0056 and id is 1 raw text is: IRET Congressional April 28, 1997 No. 59 CPI FIX WON'T SAVE SOCIAL SECURITY Budget negotiators are eager to trim the rate of growth of the CPI to help balance the budget. Trimming the growth of the CPI would cut Social Security outlays by reducing the annual COLAs aren cost of living adjustments Security's loon (COLAs) of Social Security retirement and disability benefits and federal employee System. CPI pensions. Trimming the CPI substitute for would also raise income taxes Social Security by reducing the adjustments retirement savi under tax indexing. Social Security recipients who pay income tax on their benefits would lose twice. It is critical that budget makers understand that the s ling As )t tinke or I 11g. 11% compared to current procedures, with the lower end of the range more likely. Social Security's retirement and disability deficits, on the other hand, are projected to build to more than 30% of the System's outlays over time. The Boskin Commission has estimated that the consumer price index (CPI) may overstate the rate of growth of consumer prices by 1.1 percent per year and recommends a significant overhaul of that index to assist in budget balance. Some portions of the Commissions' technical estimates are controversial, however. Budget negotiators are apparently considering a more modest assumption that the Bureau of Labor Statistics's ongoing reforms will lead to a reduction in CPI growth of about 0.4 percent per year by 2000 (an amount more nearly in line with the technical adjustments the BLS nirce of Social is likely to endorse). leficits, and Trimming the annual .on't save the growth of the CPI by 0.4% ring is not a would trim an individual's 0r rfm average Social Security ,riVatization of retirement benefits by about 4% over an average retiree's lifetime, and would cut total Social Security System retirement outlays by about 4% in any given year, once the change was fully phased in. COLAs aren't the source of Social Security's looming deficits, and that trimming COLAs won't save the System. CPI tinkering is not a substitute for major reform of Social Security or privatization of retirement saving. The CPI Social Security only modestly. does overdo COLAs, but Moving to a Trimming the annual growth of the CPI by 0.4%1 would ..cut total Social Security ... outlays by about 41 This is small compared to projected System deficits of more than 30% of outlays. The System would still go broke. For an individual retiring at age 62, the benefit cuts would be negligible the first year of retirement. By age 72, the retirement benefit would be about 4% less than under current CPI methods. By age 82 (currently about the average life expectancy for retirees at age 62), his or her benefit would be 7% to 8% below current policy levels. The more accurate CPI would probably reduce average lifetime benefits by somewhere between 3% and lifetime average reduction would be about 4%. (Men have an average life expectancy at age 62 of Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 e Fax 202-463-6199 0 Internet www.iret.org

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