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NEW MATH: OLD DEBTS // Senate proposal would reduce annual COLAs

Adding more fuel to the explosive debate over spending, some on Capitol Hill are suggesting that the government could save billions by lowering automatic annual increases in Social Security and other benefits.

The spark for the idea is a recent report by a congressionally appointed commission that estimates the Consumer Price Index overstates the rate of inflation by as much as 1 percentage point a year.

Lowering the index by 1 percentage point would trim $281-billion from the national debt over the next seven years by lowering spending on benefits and increasing tax revenues that are tied to the CPI, the commission estimates.

While the idea is far from becoming law, any tinkering at all with the CPI would reach into the household budgets of millions of Americans and raise billions of dollars at a time when Congress is trying to balance the budget.

Cost of living adjustments for Social Security, federal employee retirement benefits and spending in some poverty programs are pegged to the CPI to pace their benefits with inflation. Last year it was calculated to be 2.8 percent.

A 1 percentage point CPI reduction in 1995 would have cost the average Social Security beneficiary $6.79 a month.

The CPI also is used to protect taxpayers from what is known as "bracket creep." Income tax brackets inch up every year, tied to the index, so that workers aren't pushed into a higher tax bracket when they get a raise.

New York Democratic Sen. Daniel Patrick Moynihan alerted his colleagues on the Senate Finance Committee to the CPI issue and the commission's report on Tuesday as they began to examine a separate Republican proposal to wring $530-billion from social spending.

"If we could do this, we could free ourselves in so many ways," said Moynihan, the senior Democrat on the Finance Committee.

No one jumped to endorse the concept, though Moynihan is widely respected for his provocative thoughts on economics. Some Republican lawmakers separately are urging President Clinton to consider the idea.

"We've looked at this over the years, but we've alway backed away from it," said Senate GOP leader Bob Dole, a candidate for the Republican presidential nomination. "It will only happen if everybody kind of joins hands."

The American Association of Retired Persons, meanwhile, said adjusting the CPI is the task of economic professionals in the federal Bureau of Labor Statistics, not the politicians in Congress.

"It's a Social Security COLA cut and a tax increase. They can call it whatever they want, but this is politicizing the process," said Dave Certner, an AARP spokesman.

Congress this year appointed a commission of experts, led by former Bush administration economist Michael Boskin, to look at long-standing complaints that the CPI overstates inflation when it analyzes its market basket of goods and services.

Some economists actually believe the CPI understates the cost of medical care paid by senior citizens. But Boskin's commission headed the other way and concluded the government fails to take into account changes in consumers' behavior, such as deciding to buy lower-priced goods available at discount outlets and elsewhere. It issued an interim report Sept. 15.

The commission's report may have been one of the newer ideas to resurface in Tuesday's installment of the budget fight, but it wasn't the only one.

At least two Republican senators signaled their reluctance to enact a big tax cut sought by many in the GOP, thereby opening the door to smaller reductions in Medicare and Medicaid spending in the package to balance the budget.

In addition, moderate Rhode Island Republican Sen. John Chafee said he has serious concerns about changes in the Medicaid program included in the bill. He called it "an especially stark proposal" when juxtaposed with the failed effort a year ago to extend health care to all.

"If providing flexibility means no longer insuring our most vulnerable populations, then I believe we are heading in the wrong direction," he told his colleagues.

Senate Finance Chairman William Roth, R-Del., said the package he presented to the committee would save the programs for future generations by controlling spending. "This is what Americans want. This is what our economy needs. But equally important, this is what each of these programs needs," Roth said.

The Finance Committee is often an early signal of where the full Senate is heading. Ultimately, the Senate's legislation to balance the budget will have to be reconciled with the House's version and clear the president in order to become law. President Clinton has threatened to veto the deep spending cuts in the GOP bills.

Here is a look at the action on Capitol Hill:

Medicaid and Medicare: Unlike the House bill, the bill before the Senate Finance Committee would allow Florida to retain a special federal waiver won by Gov. Lawton Chiles to use Medicaid money to extend health care to the poor.

"I would say the Senate bill is decidedly better for us than the House on this point," said Doug Cook, head of the state's Agency for Health Care Administration. "In essence, it's $8-billion better than the House bill for the state of Florida."

One big caveat, though, are the details for distributing Medicaid money from Washington to the states. Democrats in Florida worry that limiting the growth in spending would hurt their state because of its increasing population of senior citizens.

Overall, the Senate bill reduces Medicare spending by $270-billion and Medicaid spending by $182-billion over seven years.

Democrats on the Finance Committee complained that Republicans did not have to take so much from Medicare in order to reach their stated goal of saving the trust fund that finances hospital coverage.

"Instead of fixing the basement, you're about to blow up the house and put up a pup tent where the house used to be," said Sen. Max Baucus, D-Mont.

Republicans say their plan would achieve $46.5-billion in savings over seven years by enticing seniors out of the fee-for-service Medicare program and into plans such as HMOs and medical savings accounts.

Sen. John Breaux, D-La., argued that the savings accounts, which would allow beneficiaries to buy private coverage with higher deductibles and lower premiums, are "great if you're healthy and bad if you're sick."

"If healthy people move into the MSAs and sick people stay in the system, it is going to end up costing you a lot more money," Breaux pointed out. A Republican committee aide said a Congressional Budget Office analysis of the GOP plan confirmed Breaux's hypothesis.

The Earned Income Tax Credit: This tax credit is designed to lower the tax bills that are paid by more than 18-million working poor Americans. It was enacted in the 1970s, endorsed by President Ronald Reagan and expanded under President Clinton in 1993.

Republicans want to cut the credit, saying it is rife with fraud and growing too fast. The Senate bill would make childless workers no longer eligible and lower the size of the credit to others.

The Treasury Department estimated that the Republican cuts would increase the tax bill of 17-million Americans by an average of $281. The increase would grow to $457 a year by 2005, Treasury estimated.

Sen. Carol Moseley-Braun, D-Ill., called proposed cuts in the EITC "an outright assault on poor people."

In the House, meanwhile, the Ways and Means Committee put off action on its version of GOP legislation to trim Medicare spending. Democratic congressional aides read the delay as a sign that the legislation did not save enough money to meet GOP deficit reduction targets.