Greenspan Wants To Change Price Index: Would Mean Smaller COLAs

MAY 2004
- Federal Reserve Chairman Alan Greenspan's testimony before the House
Budget Committee on February 25 has been getting a lot of headlines

Greenspan started off with
some unpleasant facts: The country faces huge annual budget deficits as
far as the eye can see and an even larger bill for retirement and
healthcare benefits for the soon-to-retire baby boom generation.

warning of the looming financial crisis of Social Security and
Medicare, he discouraged raising taxes to bolster Social Security
finances because of the dire impact to the economy.

he recommended reducing benefits for those not near retirement by
changing the cost-of-living index used by Social Security to adjust
benefits for inflation, and raising the Social Security retirement age
still higher, to correspond with increasing life expectancy.

comments on lowering cost-of-living increases in Social Security
payments to his longstanding preference for an inflation measure called
the "chained" consumer price index are shameful.

the version of the consumer price index (CPI) used to measure inflation
now, the "chained" index assumes that consumers spend less on things
when the price goes up. The effect is to lower the measured rate of
inflation. Inflation as measured by the CPI has been 2.1% since 2001.
Using the chained index it was 1.8%.

the CPI under the Greenspan proposal would be cruel to retirees,
especially those millions of people that are barely scraping by. While
it's true that the current 3% pension COLAs here in Massachusetts are
better than recent Social Security and federal retirees' COLAs, which
use the CPI, we still have the $12,000 base to contend with.

problem is that the limited $12,000 base means that only retirees and
survivors whose pensions are below that amount are receiving a true
3%," said Association Legislative Chairman Bill Hill. "That's (base) a
challenge we will continue to focus on, but in the meantime any
tinkering with the CPI, as Greenspan proposes, could result in lower
pension COLAs in hard times. Our law does allow the Legislature and
local retirement boards to use a CPI option rather than 3%. That's an
option, thankfully, they haven't been using."