COLAs: Corporate experts OK 'chained CPI’—feds don’t

Feds and labor advocates continue to push back against corporate experts who think COLAs should be calculated using a "chained CPI" formula.

A major association representing actuaries—insurance professionals who calculate financial risks and liabilities for that industry—this month issued an overview of cost-of-living formulas (COLAs), and embrace the long-controversial “chained CPI” as a legitimate model.

The group—the American Society of Pension Professionals and Actuaries (ASPPA), and specifically a piece authored by Mark J. Warshawsky—briefly summarized some of the variables that its experts see as the variables used in calculating changes in the costs of goods and services, and mathematical ways of modeling those changes. Their paper considers several known government measures—each of which has a different take on the familiar term Consumer Price Index, or CPI—include the CPI-U, the CPI-W and the CPI-E.

The CPI-U—where the U stands for the CPI “urban” index—covers price changes that most closely track the purchasing experiences of about 88 percent of the country’s population. The CPI-W stands for prices tracking “wage-earners,” an attempt at a broader measure, geographically speaking. Finally, of the major categories outlined in the piece, the CPI-E represents an effort to model prices most directly affecting the elderly.

While the article is framed mostly as an “explainer” of how COLAs—and the formulas behind them in the form of CPIs—are calculated, it skirts some very important ongoing controversies. The piece highlights Warshawsky’s promotion of something called the C-CPI-U, or “chained CPI,” a type of formula long favored by many conservative politicians—very pointedly beginning just over a decade ago, the last historical moment when a weakening in Social Security’s financial foundations worried official Washington and the public into a widening political battle over how to recalculate COLAs.  

In the debate of some years ago all the way up to the similar one shaping up now, most fed labor orgs—such as the National Treasury Employees Union (NTEU) and the American Federation of Government Employees (AFGE)—and other economic progressives continue to register opposition to the use of “chained CPI,” arguing that it could undercount the costs of inflation for many Americans.

“For years, NTEU has worked to protect federal retiree COLAs from severe cuts and even elimination,” that union recently stated. “The NTEU also fights recurring proposals aimed at replacing the formula used to determine the COLA with a ‘chained CPI.’ Over a 10-year period, a chained CPI could reduce federal annuities by thousands of dollars.”

“Since the chained index increases more slowly than the current one, this would have the effect of gradually reducing official poverty rates and the number of people eligible for means-tested government programs tied to the HHS poverty guidelines, including Medicaid and food stamps (the Supplemental Nutrition Assistance Program, or SNAP),” stated the progressive Economic Policy Institute, in a blunt 2019 paper on its opposition to government use of the measure as a guidepost for COLAs.

“[Using] the chained CPI-U for policy purposes would increase hardship among beneficiaries of government programs, define away poverty instead of reducing it, and cause the poverty threshold to fall even farther behind a middle-class standard of living,” the same document stated. “Such a move would likely be presented as a technical correction designed to take into account households’ ability to substitute cheaper goods and services in response to rising prices. However, linking the poverty threshold to the chained CPI-U would do a worse job of identifying people in poverty and near-poverty who could benefit from targeted programs.”

A few leading progressive organizations, such as the Center for American Progress, have published articles indicating that some kind of chained CPI might be fair, depending on how it is calculated. 

For more, the Bureau of Labor Statistics has published on its website a summary discussion on the chained CPI.

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