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  • CPI Story

  •   The CPI's Wide Reach

    Wednesday, December 11, 1996; Page A06

    The federal government's consumer price index -- which measures the cost of changes in a fixed market basket of goods and services -- has evolved into a statistic widely used throughout the economy to adjust for the effects of inflation. The CPI affects the pocketbooks of all taxpayers and many other citizens in a variety of direct and indirect ways. If the CPI were revised so that it rises more slowly in the future, as recently recommended by a panel of economists, the effects would ripple through the economy.

    --By John M. Berry

    The CPI affects:

    Taxes are adjusted in a variety of ways to protect taxpayers from the effects of inflation. A smaller CPI would mean almost everyone would pay more taxes than if no change were made. Some of the features adjusted each year in line with the CPI are:
  • Tax bracket break points, which determine the rates imposed on income at different levels.
  • Personal exemption and standard deduction, including the additional standard deduction for the aged and the blind.
  • Earned Income Tax Credit, the maximum amount of credit and the income range over which the maximum credit is phased out.
  • Limit on itemized deductions
  • Pension contribution limits
  • Excess pension distribution tax

  • Fully Indexed Programs
    Fully indexed programs are those in which automatic increases in benefits levels or eligibility are directly determined by the CPI. A smaller CPI change would mean benefits would not rise by as much in the future. These programs include:
  • Social Security, with nearly 45 million beneficiaries, including retirees and disabled workers, their spouses and eligible children including survivors of deceased workers.
  • Railroad retirement, with around 800,000 beneficiaries, including retirees, their spouses and eligible children.
  • Supplemental Security Income, federal welfare for 6.5 million elderly and disabled Americans.
  • Veterans' compensation, benefits paid to people with disabilities linked to service, and veterans pensions.
  • Federal military and civilian employee pensions, paid to 4 million retirees.
  • The official poverty line, by definition, rises each year in line with the CPI. Eligibility for numerous federal programs is determined by comparing income with the poverty line. Affected are 26 million recipients of food stamps, 25 million in subsidized child nutrition programs, more than 5 million with federal student grants and about the same number getting energy assistance.

  • Elsewhere
    The CPI is also used in many other ways to adjust for inflation:
  • Rents. Some contracts, particularly for commercial space, include escalator clauses using the CPI. Some localities with rent control laws use the CPI to determine the maximum allowable rent increases.
  • Employee compensation. Some state and local government pay and pensions, some labor contracts and some company compensation schemes include cost-of-living-adjustments, or COLAs, pegged to -- although not necessarily equal to -- changes in the CPI.
  • Alimony and child support payments. Some divorce agreements include escalator clauses linked to the CPI.
  • © Copyright 1996 The Washington Post Company

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