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US Inflation Index May Be Overstated

Social Security and taxes could be affected

By David R. FrancisStaff writer of The Christian Science Monitor / December 2, 1996



BOSTON

Warning: Your federal taxes could rise faster in the near future. And your Social Security payments may grow more slowly.

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That's the bad news. The good news is the American economy may be a lot stronger than anyone realized. And the federal deficit could shrink dramatically - perhaps more than $600 billion over the next 10 years.

All these changes could spring from a new Senate-sponsored study that is expected to recommend a controversial step: Require Uncle Sam to measure inflation in a different way.

The change sounds arcane. But no one doubts its importance. It could have big-time effects on every family in America, from Wall Street to Main Street.

The report, certain to be controversial, will be released Wednesday by the Commission on the Consumer Price Index. It will claim that the federal government has been exaggerating US inflation by 1 to 1.25 percent a year.

A small mistake? Not at all. It's worth billions to government, to taxpayers, and to business.

Because Social Security payments to retirees are adjusted upward for inflation every year, the report could mean that future payments will increase less rapidly. And because tax brackets are adjusted every year for inflation, it means that every taxpayer in America has been paying less than was due to Uncle Sam.

All that could now change - and the results could cut the federal deficit by $600 billion or more over 10 years.

Critics already are accusing those who want to change the inflation adjustment of seeking a back-door way to cut Social Security and boost taxes.

Dean Baker, an economist at the Economic Policy Institute, a left-of-center Washington think tank, opposes any change in the consumer price index (CPI) by Congress. If changes are made, he wants it done by experts at the Bureau of Labor Statistics. He argues that there could currently be as many downside biases built into the CPI as there are upside biases.

He expects the commission's recommendations to get a push by the Republican-controlled Congress. The White House, he says, has left its options open on the proposals. "President Clinton has been careful not to rule them out," Mr. Baker says.

The Senate Finance Committee appointed the commission in June 1995 to look into the question of whether the CPI was overstated. The commission is headed by Michael Boskin, who was chair of the Council of Economic Advisers under President Bush and is currently a professor at Stanford University in California.

An interim report by the commission in September 1995 held that the current high-side bias in the CPI was between 0.7 and 2 percentage points a year. The final report will put the bias at between 1 and 1.25 percent, according to David Wyss, an economist with DRI/McGraw-Hill in Lexington, Mass.

Mr. Wyss says the average Social Security pension of about $170 per week might go up $2 less each year using the new figures. Taxpayers could see their bill rise an average 0.5 percent each year from what it would be without the change.