Inflation-Indexing Elements in Federal Entitlement Programs
Released: 2013-04-24T00:00:00

Summary:
In recent years, various proposals have been discussed in the context of ways to reduce federal budget deficits. One of these proposals calls for the use of a different measure of consumer price change to index various provisions of federal programs, including cost-of-living adjustments (COLAs). For example, under current law, the Social Security COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Under the proposal, the Social Security COLA would be based instead on the Chained Consumer Price Index for All Urban Consumers (Chained CPI-U or C-CPI-U). Because the goal of the Chained CPI-U is to better reflect how consumers alter their buying habits in response to changes in prices, supporters of the proposal argue that it is a more accurate measure for computing COLAs and making other automatic program adjustments. Opponents, however, view the proposal as a backdoor way of reducing benefits because the Chained CPI-U typically has risen more slowly than either the CPI-W or the traditional CPI-U, the Consumer Price Index for All Urban Consumers. Some observers point out that the Chained CPI-U is published as a preliminary value that is subject to revision over a period of up to two years and that it may not accurately reflect the cost of living for certain groups, such as the elderly population.
The current discussion of a potential change in the way the Social Security COLA is computed raises questions about indexing in other federal entitlement programs. The purpose of this report is to identify key indexing elements in major federal entitlement programs under current law and present the information in a summary table. As shown here, indexing affects more than benefit levels paid to individuals through COLAs. It also affects, for example, federal payments to providers and eligibility criteria for some programs. In addition, the report provides a brief description of the measures of consumer price change used to index various elements of these programs under current law, as well as the alternative measure of consumer price change (the Chained CPI-U) that has been proposed for computing Social Security COLAs and making inflation adjustments to other federal programs.
This report does not evaluate the best measure of consumer price change for making automatic inflation adjustments in federal entitlement programs. In addition, broader issues, such as the technical aspects of different measures of consumer price change, potential implications of using an alternative measure of price change to index various elements of major federal entitlement programs, and the indexing of other items (for example, the federal poverty threshold and parameters of the tax code) are beyond the scope of this report.
For technical information on how the Chained CPI-U is constructed and reported by the U.S. Bureau of Labor Statistics, see CRS Report RL32293, The Chained Consumer Price Index: What Is It and Would It Be Appropriate for Cost-of-Living Adjustments?, by [author name scrubbed]. For information on how Social Security benefits could be affected by using the Chained CPI-U to compute annual COLAs, see CRS Report R43363, Alternative Inflation Measures for the Social Security Cost-of-Living Adjustment (COLA), by Noah P. Meyerson.

subsections: section_title: Introduction
paragraphs: In recent years, deficit reduction commissions, including the National Commission on Fiscal Responsibility and Reform, have recommended using an alternative measure of consumer price change to make inflation adjustments to federal programs government-wide. The proposal would change, for example, the way the Social Security cost-of-living adjustment (COLA) is computed, as well as COLAs under other federal programs. Rather than using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to compute the Social Security COLA, the proposal calls for basing the Social Security COLA on the Chained Consumer Price Index for All Urban Consumers (Chained CPI-U or C-CPI-U). In April 2013, a modified version of the Chained CPI-U proposal was included in President Obama's FY2014 budget. 
In general, the goal of the Chained CPI-U is to more accurately reflect how consumers alter their buying habits in response to changes in prices. The Chained CPI-U typically has risen more slowly than either the CPI-W or the traditional CPI-U, the Consumer Price Index for All Urban Consumers. Supporters of the proposal argue that the CPI-W overstates inflation and, therefore, overestimates how much money is needed for Social Security beneficiaries to maintain their standard of living. Opponents of the proposal, however, view using the Chained CPI-U to adjust Social Security benefits for inflation as a backdoor way of reducing benefits. They maintain that the market basket of goods and services purchased by the elderly is different from that of the general population around which the CPI is constructed. It is more heavily weighted with health care expenditures, which rise notably faster than the overall CPI, and thus opponents contend that the cost of living for the elderly is higher than reflected by the overall CPI. For this reason, some policy makers support using the experimental Consumer Price Index for the Elderly (CPI-E) to compute the Social Security COLA.
The current discussion of a potential change in the way the Social Security COLA is computed has raised questions about indexing provisions in other federal entitlement programs. The purpose of this report is to identify key indexing provisions in major federal entitlement programs under current law and present the information in a summary table (see Table 1 ). The programs included in the table are based on the major mandatory spending programs and categories shown in The Budget and Economic Outlook: An Update, published by the Congressional Budget Office (CBO) in August 2011, with some modifications. For example, the Congressional Research Service (CRS) identified specific programs within CBO categories (such as "child nutrition") and included additional programs, such as Railroad Retirement, that are closely coordinated with the Social Security program. Although there are other federal entitlement programs with indexing provisions, the programs included in the table represent a majority of federal mandatory spending. Table 1 is not intended to address or fully explain all of the indexing provisions within the laws and regulations governing these programs. Rather, it is an overview and a general guide.
The report also provides a description of the measures of consumer price change used to index various elements of these programs under current law and the measure of consumer price change that has been proposed for making inflation adjustments to a range of federal entitlement programs (the Chained CPI-U). It is not intended to evaluate the best measure of consumer price change for inflation adjustments within a particular program or programs. Similarly, broader issues, such as the technical aspects of different measures of consumer price change and the indexing of other items (for example, the federal poverty threshold and parameters of the tax code), are beyond the scope of this report.
For information on how the Chained CPI-U is constructed and reported by the U.S. Bureau of Labor Statistics (BLS), see CRS Report RL32293, The Chained Consumer Price Index: What Is It and Would It Be Appropriate for Cost-of-Living Adjustments? , by [author name scrubbed]. For information on how Social Security benefits could be affected by using the Chained CPI-U to compute annual COLAs, see CRS Report R43363, Alternative Inflation Measures for the Social Security Cost-of-Living Adjustment (COLA) , by Noah P. Meyerson.
section_title: Current and Proposed Measures of Consumer Price Change
paragraphs: BLS publishes the CPI-W and the CPI-U, whose month-to-month fluctuations reflect changes in the prices faced by consumers. More specifically, the change in the indexes is the average change in the retail price of a market basket composed of more than 80,000 items purchased by consumers at outlets (e.g., grocery stores and gasoline stations) in 87 urban areas across the nation. Changes in the prices of items in each area are averaged together using weights that reflect the items' importance in the spending of the CPI-W population and the CPI-U population. The national CPI-W and CPI-U are calculated by combining the local area data for all items in the market basket to obtain a U.S. city average. The rates of change in consumer prices as measured by the national CPI-W for all items and national CPI-U for all items have differed only slightly over time.
In addition to their use in calculating constant-dollar estimates of other economic indicators (e.g., earnings), the national CPI-W and CPI-U, as well as indexes for specific goods and services (e.g., medical care), are used for inflation indexing by the federal government. The percentage change in the national CPI-W (all items) is the basis for determining the annual COLA of Social Security benefits, and the national CPI-U (all items) is the basis for determining certain features of the Earned Income Tax Credit, for example. In addition, the percentage change in the CPI-U for specific groups of items is used to inflation-adjust various features of other federal programs. For example, per-meal subsidies paid to schools under child nutrition programs are tied to changes in the CPI-U "food away from home" index (which is a combination of indexes for full-service meals and snacks, limited-service meals and snacks, food at employee sites and schools, food from vending machines and mobile vendors, and other food away from home).
As part of its ongoing efforts to develop an index that more accurately measures changes in the cost of living, BLS developed the Chained CPI-U, also called the C-CPI-U. The population of the C-CPI-U and CPI-U are the same. The prices used to calculate the C-CPI-U, CPI-U, and CPI-W are the same. However, the formula for calculating the C-CPI-U better accounts for the ability of consumers to maintain their standard of living in the face of an increase in prices overall by changing their spending pattern toward items whose prices have increased more slowly and away from items whose prices have increased more quickly. 
Although the C-CPI-U was first published in 2002, the modified measure has not replaced the CPI-U or CPI-W and no federal program has used the C-CPI-U to date. Some members of the public policy community interested in curtailing growth of the U.S. budget deficit have proposed switching inflation-indexed federal programs and income tax provisions to the C-CPI-U, however. Because the C-CPI-U typically has risen more slowly than either the CPI-W and CPI-U, changing the basis for indexation could substantially lower outlays and raise revenues. But the proposal to switch from the CPI-W to the C-CPI-U has prompted concern in some quarters about the ability of Social Security beneficiaries to maintain their standard of living. Some have suggested instead changing to the experimental index for those at least 62 years of age (CPI-E) in the arguable belief that this index better reflects the elderly population's experience with inflation (i.e., this population's above-average spending on health care services whose prices have increased faster than overall prices).
section_title: Policy Considerations
paragraphs: As shown in Table 1 , inflation adjustments affect many features of federal entitlement programs. The most recognized effect of inflation adjustments is on benefit levels. For example, monthly cash benefits, such as Social Security and Supplemental Security Income benefits, increase when a COLA is paid. Other types of benefits are indexed as well. Non-cash benefits provided under the Supplemental Nutrition Assistance Program (SNAP), for example, are indexed to reflect food-price inflation. Coverage amounts under Medicare's standard outpatient prescription drug benefit (Part D) are adjusted for inflation.
Inflation adjustments also affect entitlement programs in ways that are less well known, from federal payments to providers to program eligibility requirements. For example, when a Social Security COLA is paid, the amount of wages subject to the Social Security payroll tax increases. Indexing affects the number of Medicare beneficiaries subject to higher income-related Part B and Part D premiums, as well as the amount of Medicare payments to providers. In another example, indexing affects cost-sharing amounts paid by Medicaid beneficiaries for prescribed drugs and for non-emergency services provided in an emergency room. Per-meal subsidies paid to schools, for example, under the National School Lunch program are indexed. Finally, indexing affects eligibility criteria for some programs, including Medicaid and the child tax credit. 
Generally, switching to the C-CPI-U to compute COLAs and index other elements of federal entitlement programs is considered as a cost-saving measure in an effort to reduce federal budget deficits. For example, CBO estimates that switching to the C-CPI-U to compute Social Security COLAs would reduce federal outlays by $31.0 billion over five years (FY2014-FY2018) and by $127.2 billion over 10 years (FY2014-FY2023).
If applied on a government-wide basis, however, switching to the C-CPI-U could increase program costs in some cases. Under Medicare, for example, cost-sharing amounts for outpatient drugs paid by low-income beneficiaries who receive subsidies under Part D are indexed annually to the CPI-U under current law. Because the Chained CPI-U grows more slowly than the CPI-U when consumer prices increase, indexing cost-sharing amounts to the Chained CPI-U would result in an increase in federal Medicare spending.
Similarly, consider the refundable portion of the child tax credit (referred to as the additional child tax credit or ACTC). Taxpayers must have earnings that exceed the refundability threshold to claim the ACTC. The lower the threshold, the greater the number of low-income taxpayers who become eligible for the refundable child tax credit. Indexing the refundability threshold to a lower inflation index would expand the availability of the refundable child tax credit.
Additional considerations regarding use of the Chained CPI to index federal programs for inflation are reflected in congressional testimony by CBO on April 18, 2013. CBO stated, for example,
Although many analysts consider the chained CPI to be a more accurate measure of the cost of living than the traditional CPI, using it for indexing could have disadvantages. The values of the chained CPI are revised over a period of several years, so affected programs and the tax code would have to be indexed to a preliminary estimate of the chained CPI that is subject to estimation error. Also, the chained CPI may understate growth in the cost of living for some groups. For instance, some evidence indicates that the cost of living grows at a faster rate for the elderly than for younger people, in part because changes in health care prices play a disproportionate role in older people's cost of living. However, determining the impact of rising health care prices on the cost of someone's standard of living is problematic because it is difficult to measure the prices that individuals actually pay and to accurately account for changes in the quality of health care.
section_title: For Additional Reading
paragraphs: For more information on the programs referenced in the table, see the following CRS reports.
Social Security : CRS Report R42035, Social Security Primer , by [author name scrubbed]
Medicare : CRS Report R40425, Medicare Primer , coordinated by [author name scrubbed] and [author name scrubbed]
Medicaid : CRS Report R43357, Medicaid: An Overview , coordinated by [author name scrubbed]
Supplemental Security Income : CRS Report 94-486, Supplemental Security Income (SSI) , by [author name scrubbed]
Earned Income Tax Credit : CRS Report R43805, The Earned Income Tax Credit (EITC): An Overview , by [author name scrubbed] and [author name scrubbed]
Child Tax Credit : CRS Report R41873, The Child Tax Credit: Current Law and Legislative History , by [author name scrubbed]
Unemployment Compensation : CRS Report RL33362, Unemployment Insurance: Programs and Benefits , by [author name scrubbed] and [author name scrubbed]
SNAP : CRS Report R42505, Supplemental Nutrition Assistance Program (SNAP): A Primer on Eligibility and Benefits , by [author name scrubbed]
Child Nutrition Programs : CRS Report R42353, Domestic Food Assistance: Summary of Programs , by [author name scrubbed] and [author name scrubbed]
Civil Service Retirement System / Federal Employees Retirement System : CRS Report 98-810, Federal Employees' Retirement System: Benefits and Financing , by [author name scrubbed]
Military Retirement : CRS Report RL34751, Military Retirement: Background and Recent Developments , by [author name scrubbed] and [author name scrubbed]
Veterans Disability Compensation : CRS Report RL34626, Veterans' Benefits: Disabled Veterans , by [author name scrubbed] et al.
Veterans Pensions : CRS Report RS22804, Veterans' Benefits: Pension Benefit Programs , by [author name scrubbed] and [author name scrubbed]
Dependency and Indemnity Compensation : CRS Report R40757, Veterans' Benefits: Dependency and Indemnity Compensation (DIC) for Survivors , by [author name scrubbed]
Veterans Educational Assistance : CRS Report R42785, GI Bills Enacted Prior to 2008 and Related Veterans' Educational Assistance Programs: A Primer , by [author name scrubbed]
Veterans Educational Assistance : CRS Report R42755, The Post-9/11 Veterans Educational Assistance Act of 2008 (Post-9/11 GI Bill): Primer and Issues , by [author name scrubbed]
Veterans Vocational Rehabilitation and Employment Program : CRS Report RL34627, Veterans' Benefits: The Vocational Rehabilitation and Employment Program , by [author name scrubbed]
Railroad Retirement Board : CRS Report RS22350, Railroad Retirement Board: Retirement, Survivor, Disability, Unemployment, and Sickness Benefits , by [author name scrubbed]