Congress Uses Outdated Inflation Measures for Welfare Spending

Romina Boccia and Tyler Turman

Last week, the Social Security Administration announced a 3.6 percent increase in monthly Social Security and Supplemental Security Income (SSI) benefits for 2027. This cost-of-living adjustment is meant to keep recipients’ benefits in step with inflation. The problem: Congress adjusts government benefit programs with a different inflation measure from the one used for Americans’ income tax brackets.

SSI and many other benefit programs make similar adjustments using variations of the Consumer Price Index (CPI). These measures have methodological flaws that overstate inflation by failing to properly account for how consumers adjust their spending as prices change. Consequently, federal taxpayers foot the bill for automatic benefits and eligibility increases that exceed what rising prices alone would justify.

Congress already uses a more accurate inflation measure, chained CPI‑U, for the tax code. That double standard costs taxpayers twice: tax brackets rise more slowly, while spending and eligibility thresholds grow faster than they would under the same measure. Congress should fix this inconsistency and index benefit programs to chained CPI‑U, as well.

Measuring Inflation the Wrong Way

The Bureau of Labor Statistics (BLS) calculates CPI to estimate how prices change over time for a basket of goods and services bought by consumers.

Social Security and SSI benefits are adjusted with CPI‑W, which tracks prices paid by urban wage earners and clerical workers, who make up about 30 percent of the US population.

CPI‑U tracks prices paid by urban consumers, who make up more than 90 percent of the population. The Department of Agriculture uses food-specific components of CPI‑U to update the cost of the Thrifty Food Plan, which determines maximum food stamp benefits. Separately, the overall CPI‑U updates the Health and Human Services’ (HHS) federal poverty guidelines used to set income eligibility limits for numerous benefit programs, including food stamps, school meal programs, Head Start, the Children’s Health Insurance Program (CHIP), and parts of Medicaid.

CPI‑W and CPI‑U fail to account for consumers switching between categories of goods as prices fluctuate. For example, if the price of apples rises relative to oranges, consumers tend to buy more oranges and fewer apples. Understating this substitution effect introduces an upward bias in both inflation measures.

The Case for Chained CPI

Recognizing the flaws in existing CPI measures, BLS began publishing the Chained Consumer Price Index for All Urban Consumers, or chained CPI‑U, in 2002. Chained CPI‑U tracks the same urban consumers as CPI‑U, but accounts for substitution across spending categories. As a result, chained CPI “provides a more accurate estimate of changes in the cost of living from one month to the next,” according to the Congressional Budget Office (CBO).

Cato scholar John Early estimates that federal taxpayers would have saved more than $2.6 trillion from 1975 to 2021 had Social Security, SSI, food stamps, Medicaid, and CHIP been indexed to chained CPI‑U (and a similar inflation measure for the years before chained CPI existed). Looking ahead, federal taxpayers could save $188 billion over the next decade if Social Security benefits were indexed using chained CPI‑U. Savings from other benefit programs, including welfare programs, could exceed $90 billion.[1]

Opponents argue that switching to chained CPI would reduce eligibility for welfare programs and slow benefit growth, and that the poverty line could fall behind the prices low-income households pay. Research suggests that these households have experienced somewhat higher inflation than the broader population, partly because rent accounts for a larger share of their budgets.

No inflation index can perfectly account for every individual household’s expenses, and differences in the inflation experienced by low-income households deserve scrutiny. But those differences do not justify retaining a formula that fails to account for substitution across spending categories. Benefit adequacy and eligibility are separate policy questions that legislators should debate directly, rather than defaulting to measurement bias to automatically expand programs.

Fixing Congress’s Double Standard

In the 2017 tax law, Congress switched the inflation index for income tax brackets from standard CPI‑U to the more accurate chained CPI‑U. Because chained CPI‑U grows more slowly than standard CPI‑U, tax brackets also rise more slowly. This pushes taxpayers into higher income tax brackets more quickly than they otherwise would, raising federal tax revenues.

Yet Congress has failed to apply this same standard to benefit programs. Taxpayers should not face higher taxes from both slower adjustments to their tax brackets and automatic benefit and eligibility increases driven by an upwardly biased inflation index.

Budget rules bar Social Security reform via reconciliation. However, with Congress considering another reconciliation bill in the upcoming lame duck session, lawmakers should require all other benefit programs that index benefits or eligibility standards to inflation to use chained CPI‑U. This would tie benefit programs to an inflation measure that better tracks overall price growth and help put benefit spending on a more sustainable fiscal path.

Source: https://www.cato.org/blog/congress-uses-outdated-inflation-measures-welfare-spending