CPI CHANGE WOULD HIT POOR HARDEST.

Byline: Alan Fram Associated Press 

Poor and older Americans would be hit hard if the government's inflation gauge were adjusted downward, due chiefly to their heavy reliance on Social Security, federal pensions and other annually adjusted benefits.

Last week, a Senate advisory panel said the Consumer Price Index overstates inflation by 1.1 percent and should be replaced by a more accurate measure. The proposal would reduce budget deficits by $691 billion over a decade by reining in cost-of-living increases for many federal benefits, the earned income tax credit for the working poor, and the personal exemption and standard deduction that most taxpayers use.

A little-noticed analysis the nonpartisan Congressional Budget Office conducted of a similar plan in 1995 illustrates its consequences. The budget office said Americans earning $30,000 annually or less would bear 34.9 percent of its costs, even though they earn roughly 16.5 percent of the nation's income.

Inversely, people making $100,000 or more - accounting for 31.9 percent of the country's income - would pay just 16.9 percent of the price tag of changing the CPI calculation, the CBO said.

It also analyzed the plan another way, comparing different income groups' average earnings before and after the proposed inflation change. Measured this way, lower-income Americans would lose a larger share of their projected income to lower benefit payments and higher taxes than those better off.

The CBO study assumed the Consumer Price Index would be reduced by 0.5 percent.

The statistics reflect that there are more low-income than high-income Americans. Also, poorer people tend to get a greater portion of their incomes from inflation-adjusted federal benefit payments like Social Security and retirement and veterans' pensions. One affected program, Supplemental Security Income, is paid only to low-income elderly and disabled people.

On the tax side, the consequences are more complicated.

As a group, the well-off would bear a heavier burden than the poor if there were smaller annual inflation increases for income tax brackets, the personal exemption and standard deduction. That is because most poor people owe little or no taxes, while higher earning people generally pay much more.

On the other hand, low-earning taxpayers as individuals would lose a greater portion of their incomes than the wealthy if the personal exemption and standard deduction grew more slowly. That is because each extra dollar a low-income person pays is a greater proportion of their earnings than each extra dollar a better-off person pays.

The AFL-CIO, the American Association of Retired Persons and others are already gearing up against the proposal.

``This is about whether we are going to say to tens of millions of Americans on the cusp of the poverty line, `We're going to reduce your income for the next 10 years,' '' said AFL-CIO public policy director David Smith.

Even Michael Boskin, the Stanford University economist and former Bush administration adviser who headed the panel, does not flatly reject those arguments. He said in an interview Monday that if President Clinton and lawmakers had such worries, they should change the affected benefits directly, not continue to measure inflation inaccurately.

``There's almost never a major change made in tax laws, benefit programs that doesn't have a variety of problems that have to be thought through,'' he said. ``Sometimes you have to make adjustments elsewhere as well. This may be one of those times.''

If lawmakers decided to change the cost-of-living calculation and simultaneously cushioned low-income people from some of its effects, that would complicate the politics of the exercise. The effort would be transformed from a bipartisan decision to correct faulty calculations to a more contentious effort to redistribute income.

CAPTION(S):

Box, 3 Charts

Box: (Color) Who pays for a new CPI

Associated Press

Chart: (1--Color) Overall percentage of income and benAefits lost per family

(2--Color) Average dollar cost in lost benefits and higher taxes per family

(3) Distribution of costs of the new plan

Associated Press