A story in yesterday's Business & Finance section incorrectly cited a Congressional Budget Office figure on projected budget savings on the new Consumer Price Index CBO did not make a budget savings projection as stated by the House budget subcommittee.
The Labor Department announced yesterday that it will change the computation of the consumer price index, a move that could reduce Social Security and wage increases for millions of workers and retirees.
The changes, scheduled to take effect in 1983 and 1985, were attacked immediately by groups representing retired persons and organized labor, whose members have the most to lose by the new system.
The Bureau of Labor Statistics, which has authority to define how the CPI is calculated, will start using a different method for determining rises in housing costs, Commissioner of Labor Statistics Janet L. Norwood said at a press conference yesterday.
Housing costs make up approximately 25 percent of the current CPI. Under the change, the housing component will be reduced to approximately 14 percent of the index, according to BLS officials.
Initial reaction on Capitol Hill was generally favorable, primarily because of the potentially large budget savings involved. Some congressional analysts pointed out, however, that strong opposition could develop if labor and groups representing retired persons start a major lobbying campaign against it. Congress does not have to authorize the change, but it could pass legislation specifying how the CPI must be computed, BLS officials said.
The increases currently are computed according to home prices and interest costs for families that bought houses during the period. This has been criticized widely by economists as giving unrealistic weight to volatile mortgage interest rates. In addition, the current system does not reflect recurring housing costs for most people because only a small percentage buy a home in any one month, it has been argued.
The new computations will use a "rental equivalence" measure, both actual market rents and what owner-occupied homes would rent for, in calculating housing cost increases.
The CPI is used in formulas for cost-of-living increases in a number of government programs, including Social Security, civil service and military pensions, and food stamps. It also is widely used for cost-of-living adjustments under major labor contracts.
Norwood said repeatedly yesterday that the BLS has no way of knowing whether the new system will mean a higher or lower CPI, but an experimental system using the rental-equivalency method resulted in figures almost always lower than the current CPI.
In September, for example, the all-urban consumers' CPI, the most widely watched figure, showed an 11 percent increase from the previous year. Under the experimental method, the figure was 9.2 percent. The new method would result in higher figures if interest rates or home prices dropped, the BLS said.
Congressional Budget Office figures projected that use of the new method would save $25.2 billion from fiscal years 1982 to 1986 in Social Security benefit increases alone.
Rep. Paul Simon (D-Ill.), chairman of the House Budget Committee task force on indexing, supported the change, saying his only criticism is that it won't go into effect sooner.
"I am pleased that Rip Van Winkle has finally awakened," Simon said, referring to the BLS. The current CPI is "unrealistic, like a rollercoaster. It goes up to fast and comes down too fast. We need stability," he said.
James Hacking, assistant legislative counsel for the American Association of Retired Persons, said his group is "quite concerned" about the change. While the elderly may be overcompensated for housing costs, they are undercompensated on increases in food, utilities and medical care, he said.
"If they are only going to focus on the housing component, it's clear that the hidden agenda is to lower benefits for Social Security" and other programs, Hacking said.
Lane Kirkland, president of the AFL-CIO, charged that the administration is changing the computation of the CPI because it doesn't like the inflation figures it has been seeing.
"The administration is out to undercut our most important measure of inflation--instead of switching to an effective anti-inflation program," Kirkland said in a statement.
Norwood insisted, however, that the new policy was "a technical decision, a professional decision, which I made." There was no political motivation, nor did she take budgetary factors into consideration, Norwood said. The reason for the change is solely to make the CPI more accurately reflect true housing costs, she said.
"Users were getting wary of using the CPI because it had eroded" due to unrealistic housing data, Norwood told reporters.
She added, however, that a change became more important because of this year's tax bill, which included indexing of taxes for inflation, using the CPI, starting in 1985.
One measure, CPI-U, which will be used for the tax indexing, is to change to the new method in 1983. Another, CPI-W, the one used for most government programs and most widely used in labor contracts, will go to the new system in 1985, Norwood said. The delay is necessary to give users substantial advance notice of the change, she added.