FEDERAL BENEFITS TARGETED : GREENSPAN PROPOSES REVISED PRICE INDEX.

Byline: Richard W. Stevenson The New York Times

Federal Reserve Chairman Alan Greenspan urged Congress on Thursday to move quickly to limit cost-of-living increases for Social Security and other federal benefits. In doing so, he waded directly into one of the most politically sensitive issues facing the government.

Greenspan said the Labor Department should speed its efforts to fix a range of shortcomings in its main measure of inflation, the Consumer Price Index, that have led, according to estimates by some economists, to overstating increases in the cost of living by about 1 percentage point.

But in the meantime, Greenspan said, Congress should establish an independent national commission to set more accurate cost-of-living increases. That would avoid payment of what are seen as overly generous benefits to Social Security recipients and others whose annual increases are tied to the inflation index.

Over time, putting a brake on cost-of-living increases could save the government hundreds of billions of dollars and make it easier to balance the budget without cutting other programs. But it would do so by giving a little less money every month than now planned to tens of millions of voters who receive checks from the federal government.

``This type of approach would have the benefit of being objective, nonpartisan and sufficiently flexible to take full account of the latest information,'' Greenspan told the Senate Finance Committee.

Greenspan's suggestion for a commission revived an idea he had proposed two years ago, before the issue had any political visibility. It was immediately embraced by Sen. Daniel Patrick Moynihan of New York, the committee's ranking Democrat, and aides said it intrigued some Republicans, including the panel's chairman, Sen. William Roth of Delaware.

Greenspan's stature provides some political cover for members of both parties who support revising the price index downward but fear the outcry from the elderly and other benefit recipients. Labor unions and the American Association for Retired Persons already have expressed opposition.

Nonetheless, Greenspan's strong advocacy for the proposal could help its prospects in negotiations between Congress and the White House over how to balance the budget and also could offer a mechanism to extend the long-term solvency of Social Security.

Asked about Greenspan's call for a commission, White House press secretary Mike McCurry said the Federal Reserve chairman would be ``an influential voice'' in the debate over how to address the issue. The Clinton administration has said it is open to considering a change in the price index, but only if there is a consensus among economists about how to proceed.

Some Republicans said they were considering introducing a nonbinding ``Sense of the Senate'' resolution in the next few weeks calling for an improved measure of inflation. They said the vaguely worded resolution would be a first step in gauging how much support could be mustered for a change with which neither party wants to be closely identified.

The administration also said Thursday that it would propose increasing funds for the Bureau of Labor Statistics by $2 million next year and $7 million to $10 million for each of the succeeding six years for additional research into the price index. The bureau now spends $40 million a year administering the index.

Katharine G. Abraham, the commissioner of labor statistics, told the Senate Budget Committee that the increased funds, amounting to $55.1 million over seven years, would allow the agency ``to speed up the process'' of updating and expanding the price index to achieve a better approximation of changes in the cost of living.

The bureau has always said that the Consumer Price Index is not a pure measure of inflation and should not be used to set federal benefit payments. But it has taken on that role anyway, and it also adjusts tax brackets, private employment contracts and other transactions.

Greenspan has said publicly for years that he believes the Consumer Price Index overstates inflation. Last week he told the Senate Budget Committee that research by the Federal Reserve concluded that the overstatement was around 1 percentage point a year, roughly the same conclusion reached by a congressionally appointed panel of economists last month.

That panel, headed by Michael Boskin, a Stanford University economist, said the overstatement would cost the government hundreds of billions of dollars over the next 12 years in more generous benefit payments and smaller tax collections.