With Congress seeking ways to erase the federal budget deficit, Federal Reserve Chairman Alan Greenspan has attracted attention by arguing the government could save $150 billion over the next five years simply by adjusting the consumer price index, which he says overstates the true rate of inflation. But the commissioner of labor statistics, Katharine G. Abraham, said in an interview yesterday there is no valid basis on which to make such an adjustment in the index, which is used to determine cost-of-living increases in everything from Social Security benefits to personal income tax brackets.
Abraham said BLS research has shown that there is some overstatement of changes in the cost of living in the CPI, but that the amount of overstatement is impossible to pin down statistically and that it is smaller than Greenspan has suggested.
Greenspan said the range of possible overstatement is 0.5 to 1.5 percentage points annually, a substantial amount compared with last year's CPI increase of 2.7 percentage points. Taking the midpoint suggests using an indexing formula of the CPI change minus 1 percentage point, he said, and that was the basis on which the potential budget savings was calculated.
But Abraham challenged the upper part of that range. "I don't think their saying the range is 0.5 to 1.5 percentage points indicates that 1 percentage point is the best guess" for an adjustment, she said. "Everyone who has looked at this has concluded that there is just enormous uncertainty in these estimates. . . .
"Would adjusting the CPI by 0.5 percentage points be within the range suggested?" Abraham asked. "Do we have any reason to be confident that is the right adjustment? I don't think so."
The director of the Congressional Budget Office, Robert D. Reischauer, suggested to the Senate Budget Committee Wednesday that a 0.5 percentage point adjustment rather than Greenspan's 1 percentage point might be more appropriate based on CBO's analysis. Such a smaller adjustment would save $64 billion over five years, he said.
Further muddying the waters, Greenspan told the Senate Finance Committee Wednesday that any change in the indexing formulas for retirement benefits should perhaps take account of other BLS research suggesting that the cost of living for older people may be going up 0.2 to 0.3 percentage points faster than for younger Americans. That is because of older people's greater spending on health care.