THE QUICKEST FIX OF ALL

By LEON JAROFF

To Senator Daniel Patrick Moynihan, the news was electrifying. The New York Democrat raced to the telephone and called Joseph Stiglitz, head of President Clinton's Council of Economic Advisers. "Get the President to call Bob Dole--fast!" he urged. Moynihan, who was shopping around a dramatic proposal, had just witnessed a rare moment in Washington--the possibility of bipartisan, let's-jump-off-together risk taking. Senate majority leader Dole had mumbled something positive about the idea; if the White House, too, gave it a nod, the seemingly intractable deadlock over how best to balance the federal budget could be broken; sharp cuts in Medicare and Medicaid would be avoided; and both Republicans and Democrats might get away with milking large amounts of cash from the most sacred of cows: Social Security.

The Moynihan proposal claimed that the budget crisis was, in his words, "easily fixed." What needed fixing, he said, was the Consumer Price Index, or CPI. By simply subtracting a single percentage point from the index published monthly by the Bureau of Labor Statistics, Moynihan declared, the Treasury would save $634 billion over the next 10 years, partly in reduced cost of living adjustments to people who collect entitlement checks. Moynihan's idea, in various forms, has long been bandied about by economists. But now it has caught the attention of both Democrats and Republicans. Both sides are heading for the Great Standoff of 1995 over the budget, with Republicans threatening to block an increase in the federal debt ceiling if the White House doesn't agree to erase the deficit in seven years. At that point, says Moynihan, "the White House is going to say, What can we do that the Democrats will accept and the Republicans will say is deficit reduction?"

That's when the CPI fix could prove handy. The index is actually an imperfect measure of inflation that the Bureau of Labor Statistics calculates by keeping track of consumer prices for a so-called basket of 364 categories of goods and services; those prices are compared with what was charged for the same items in a 1982-84 base period. Just as a rising tide lifts all ships, a CPI that increases 2%, for example, automatically boosts by the same percentage such federal expenditures as Social Security payments, civil service pensions and earned-income tax credits.

These increases, amounting to billions of dollars annually, might be fair and reasonable, say critics of the CPI, if the index accurately reflected the cost of living increases. But apparently that is not the case. The index, according to Federal Reserve Chairman Alan Greenspan, "overestimates the true cost of living." As a result, some experts say, over the past few decades the Federal Government has doled out $300 billion more in benefits than the true inflation rate would warrant.

Greenspan's conclusion is supported by the Congressional Budget Office, which estimates that the CPI has grown faster than the cost of living by between 0.2 and 0.8 percentage points annually in recent years. An advisory panel to the Senate Finance Committee reported last month that the annual CPI overestimate could be as high as two points.

Economists blame some of that discrepancy on the CPI's failure to gauge the changing habits of consumers. When the price of a basket item like beef rises, for example, many consumers will switch to chicken. So for them the cost of living does not increase. Moreover, the CPI has not adjusted its basket fast enough to account for the dramatic increase in discount retailing.

Should Moynihan's suggested one-point cut in the CPI be adopted, the effect on many Social Security recipients would hardly be calamitous. For example, a 3% annual rise in the CPI would increase a retiree's average monthly Social Security check of $698 by $20.94. Stripping one percentage point from the CPI rise would cut the increase to $13.96, about $7 less a month.

David Certner, an analyst for the American Association of Retired Persons, is more outspoken. "We can argue about what the last election was about," he says, "but it seemed clear to me that all of these guys were committed to not cutting Social Security. We'll certainly make it clear that this is a Social Security cut and tax increase in disguise."

A tax increase? In effect, yes. Personal exemptions for each member of a taxpayer's family, along with the standard deduction, are indexed to the CPI. Consequently, whittling down the CPI percentage rise would stunt their growth. Because tax brackets are indexed too, increases in the top limits for the brackets would be smaller. That would nudge more wage earners into higher brackets and thus make them liable for higher taxes.

Faced with the prospect of voter retaliation, neither Congress nor the White House seems willing to go it alone. "Reasoned adjustments [in the CPI] should be made," said Dole, "but it will only happen if everybody sort of joins hands." Yet at week's end Moynihan's impetuous call to the White House had resulted only in a cautious statement by economist Stiglitz, urging that adjustments to the CPI "should be done on the best scientific evidence" and "not be politicized." But with taxes and Social Security at stake, that outcome seems almost impossible.

--Reported by Suneel Ratan and Karen Tumulty/Washington

With reporting by SUNEEL RATAN AND KAREN TUMULTY/WASHINGTON