ONE REASON the federal government is likely to have annual deficits on the order of $200 billion at least through 1988 is indexing. Some 41 percent of current federal spending is indexed, which means that it rises automatically as the consumer price index rises. Beginning in 1985, income taxes are scheduled to be subjected to indexing too; tax rates will be adjusted so taxpayers won't ascend to higher tax brackets simply because their nominal incomes have been increased by inflation.
A superficially attractive case can be made for indexing. But no one denies that it's very costly. The "structural deficits" President Reagan talks about are the result not of some natural phenomenon. Rather they are the result of a political decision to hold down revenues but to increase spending by indexing. Now some politicians, looking to those "out years" after the 1984 election and concerned about cutting deficits, are giving indexing some second thoughts.
One such is Rep. James Jones (D-Okla.), chairman of the House Budget Committee, who, with Rep. Carroll Campbell (R-S.C.), has introduced a bill to reduce the amount of indexing for taxes and non-means-tested benefit programs. Social Security benefits, other federal retirement benefits and federal pay, as well as tax rates, would be adjusted not by the inflation rate as measured by the CPI, but by the CPI minus 2 percent; if inflation were 6 percent, benefits would go up only 4 percent. That sounds fair to everyone. But in practice it would be terribly unfair to retired people. For each year of inflation, their benefits would fall farther and farther behind their original value. Mr. Jones says he is not wedded to specific features of his proposal. But any proposal that indexes retirement benefits by something less than the CPI has the same defect.
Government has already done something to ease the effect of indexing: the Bureau of Labor Statistics has revised the CPI, so it will not overstate inflation as the old formula did in 1979 and 1980. So far, voters have accepted this change without a murmur, and they might accept without much protest the abolition of indexing of tax rates, whose initial benefits for most taxpayers are minuscule. But it is going to be hard to get anyone to eliminate indexing of benefits, which will hurt. It is especially threatening to people who are retired, and who have no other protection against inflation.
Fiddling with formulas won't help much; there is an inherent problem here. As long as inflation is above zero, there will always be inequities, whatever indexing formula you use. Inflation redistributes wealth in ways that no indexing formula can compensate for precisely. So there's a lot to be said for getting rid of indexing formulas and giving everyone an incentive to avoid inflation. But the last place to begin is with retirement benefits and pensions.