The signs are everywhere, and it doesn’t much matter which party wins, now that Nancy Pelosi’s drinking the Kool-Aid: They’re going after Social Security and Medicare in the lame duck session. They’ll do it with what sound like “reasonable” adjustments like chaining payments to the Consumer Price Index, claiming it more accurately reflects the cost of living. (It doesn’t. For one thing, it doesn’t include the cost of heat. Grandma ice pops!) Economist Dean Baker says of course it’s not supposed to be more accurate, and calls the proposed switch a very big deal:
First of all, when all the inside Washington types agree on something, it is a good idea to hang on to your pocket books. Remember, these are the folks who thought it was great that everyone was becoming a homeowner in the middle of a housing bubble and that Alan Greenspan was the greatest central banker of all-time. In other words, inside Washington types are a group of people that mindlessly repeat the conventional wisdom and are largely incapable of original thought.
At the most simple level, the switch to a chained CPI is a way to reduce the annual COLA in Social Security by roughly 0.3 percentage points. That may sound trivial, but it is important to remember that this sum adds up over time. After ten years, this lower annual cost-of-living adjustment would imply a reduction in benefits of roughly 3 percent, after 20 years the reduction would be 6 percent, and after 30 years close to 9 percent. So this is real money.
This plan to lower the COLA raises two obvious questions. First would the new measure actually be more accurate, and second is a cut in Social Security benefits good policy?
There are some complex philosophical issues raised by a cost-of-living index but at the most basic level, the question is to what extent Social Security beneficiaries substitute between items to offset price increases. The proponents of switching to a chained index for the COLA are arguing based on research that examines the consumption patterns of the population as a whole.
The Bureau of Labor Statistics (BLS) has done research indicating that the Social Security population has qualitatively different consumption patterns than the rest of the population. This research suggests that a consumer pirce index based on the consumption patterns of the elderly would show a higher rate of inflation.
The BLS research would imply that someone who is concerned about the accuracy of the Social Security COLA might want a higher annual cost-of-living adjustment, not a lower one. Of course the BLS research is not conclusive, since BLS did not directly monitor the actual purchasing patterns of the elderly, examining the specific items they buy and the outlets where they shop.
However, BLS could do this and construct a full elderly CPI. This would cost in the neighborhood of $10-20 million. While that may seem expensive, this index is being used to determine a COLA for $700 billion in annual spending. If the full elderly index turned out to show the same rate of inflation as the overall CPI, then there would be no need to continue to do it. However, if the rates differ, then we would continue to maintain the elderly CPI, if the interest is accuracy.
This is a simple way to distinguish between people who want an accurate COLA and people who just want to cut benefits. Those who want an accurate COLA advocate having BLS construct a full elderly CPI. People who just want to switch the indexation to a chained CPI simply want to cut benefits.
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