Greenspan Proposes Special Panel for Benefit Increases

WASHINGTON —  Federal Reserve Board Chairman Alan Greenspan suggested Thursday that Congress set up a special commission to determine how much to pare cost-of-living increases in federal programs to offset the effect of flaws in the consumer price index, the benchmark for such calculations.

His proposal for a commission, laid out during a hearing of the Senate Finance Committee, would not alter the consumer price index itself, which is compiled monthly by the Labor Department. That would be left to government statisticians, who would work simultaneously to improve the index.

Greenspan said his approach could save billions of dollars in federal outlays and tax breaks, which some analysts say are too generous because the CPI substantially overstates increases in living costs.

A blue-ribbon panel of economists that studied the issue reported late last year its findings that the CPI overstates inflation by 1.1 percentage points a year. Since the report’s release, the question of how accurately the CPI measures living costs has become a major controversy. Besides its effect on billions of dollars in federal outlays and tax breaks, the index is also used to calculate cost-of-living increases in workers’ wages and private contracts.

If the index has been overstating the inflation rate as much as the panel estimates, then widespread assertions that economic well-being has declined in recent years could be in error, analysts said.

In his remarks, Greenspan also criticized current proposals to allow the federal government to invest money from the Social Security trust fund in the stock market--on the theory that stock investments would bring a higher return--rather than in Treasury securities, as now is done.

Greenspan also expressed apprehension that using Social Security monies to buy stocks might give the government too big a say over private business. “It would make me very uncomfortable,” he said.

Greenspan’s proposal for the CPI issue drew a favorable reception from members of the Senate Finance panel, but the lawmakers stopped short of openly embracing the plan.

Meanwhile, Katharine G. Abraham, head of the Bureau of Labor Statistics, told the Senate Budget Committee that her agency is working to improve the CPI and that it should be able to put a new version into effect in 1999.

Greenspan’s plan calls for a two-track approach:

First, the Labor Department statisticians would work to improve the current index to provide a better measure of inflation, and also to develop a separate new index designed to measure changes in the cost of living--that is, how much it takes for a family to maintain its living standard.

Although the CPI measures changes in prices only, it is widely used in calculating cost-of-living increases in government benefits and private wages.

While the improvement work is being done on the CPI, Congress would set up a panel of academics to decide how big a cost-of-living increase the government should provide for Social Security benefits and other government programs each year.

Greenspan said his proposal would keep the process of improving the CPI essentially free of political influence while enabling legislators to have a say in how much to increase federal benefits--something he characterized as basically a political decision.

“I don’t think you should, nor would I think it appropriate to give specific instructions” to the labor statistics board on how to revise the index, Greenspan told the Senate panel.

The flaws in CPI calculations have been known to economists for several years but were highlighted in December when an advisory commission headed by Stanford University economist Michael J. Boskin declared that the index overstates the rise in living costs and ought to be revised.

The thrust of the commission’s argument is that the CPI, which only measures prices on a specific market basket of goods, fails to take into account quality changes in products or the ways that families can hold expenses down by substituting less expensive goods.

Although Greenspan essentially agrees with the advisory panel’s conclusions, he told the Finance Committee that there are “great disputes about what the various biases are” and “how to correct them” and that authorities should not rush to make a change.

He said that the two-track approach he recommended would enable Labor Department statisticians to make the changes gradually while at the same time permitting the academic panel to move quickly to correct the impact of the index’s flaws on federal programs.