Michael Maiello's picture

    The Chained CPI Scam

    From a spending standpoint one of the problems for Social Security, and for any retirement annuity or lifetime pension, is how to maintain purchasing power for recipients in a world of generally rising prices.  It would be so nice, all agree, if prices could just be made not to rise so quickly.  This is, unfortunately, very difficult to control.

    Enter the Chained CPI.  It's a measure of inflation that takes the substitution effect of consumers changing their buying habits in response to a rise in prices.  If the price of steak goes up, the story goes, consumers buy more chicken and the government doesn't have to worry about making sure that retirees can keep up with the price of steak.

    The steak/chicken analogy is popular among Chained CPI proponents, I suspect, because it's so inconsequential.  Americans don't generally believe that society owes you a dry-aged porterhouse.  Chicken will do.

    Chained CPI proponents also like to talk about all of the gadgets out there.  Once adopted, prices for televisions, microwaves, cell phones and computers of all types tend to plummet.  One day, you can't afford the new iPad.  A few years later, you can get something just as good at a bargain price.

    It's easy to trivialize inflation with these anecdotes and analogies.  It's also easy for politicians to argue that moving Social Security to the Chained CPI, as opposed to the current Consumer Price Index which measures the prices of a fixed basket of goods, is not a cut, it's just in line with reality.  Yes, it will slow the growth of Social Security payments over time, but nobody will sacrifice anything.

    Except that, they will.  The Chained CPI is a race to the bottom.  Maybe the idea of somebody giving up steak for chicken doesn't bother us.  But the Chained CPI memorializes that consumer choice.  What happens when the price of chicken rises?  Somewhere down the line, you're eating potted meat like a hobo.

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    I highly recommend Dean Baker on this subject.  The short version is that there isn't anything inherently wrong with the methodology, but rather how proposals are using it.  Chain-weighting is a perfectly viable methodology, but an increase in benefits over time is indicated, not a decrease:

    While it is often claimed that this switch will make the COLA more accurate, this is not clear. What is certain is that the switch would lower benefits. The research on the C-CPI-U shows that the switch would reduce benefits by roughly 0.3 percentage points a year compared with the baseline. This means that after someone has been retired for 10 years, their benefits would be 3 percent lower. After 20 years of retirement, their benefits would be 6 percent lower and people living into their 90s and collecting benefits for more than 30 years would see a drop in benefits of more than 9 percent. This might be especially difficult since the oldest of the elderly also tend to be the poorest.

    Much like raising the Medicare age, it's an adjustment that looks sensible only superficially.  If you actually game out what would happen over 10 or 20 years, it's not good and would disproportionately harm the vulnerable while failing to address solvency issues.

    That said, chained CPI could be a completely viable approach.  It's just that, as Baker indicates, it needs to be based on proper data about real costs that SS recipients are actually facing.  As he says, Congress could request that the BLS put this data together.


    Interesting that Baker points out that the oldest, who may have outlived savings or have been on a fixed income against inflation for a long time, are the poorest.  I stumbled on something today where a Chained CPI supporter was trying to spin it the other way -- rich people live longer, they said, so they can weather the cuts in benefit increases.


    As Krugman has been pointing out lately, it does appear that gains in life expectancy have primarily gone to those at the top of the income spectrum, but I don't see how it necessarily follows that the oldest people are also the richest.


    LET THEM EAT STEAK!

    Grocery shopping is much more complicated.

    I do not care a whit whether folks eat steak!

    I am working on a blog about food/inflation/nutrition and the wonders of man. hahahahah

    Hell, when I was a kid, the telephone was on the wall, it was rotary and it cost ten bucks a month. Plus long distance.

    Now we need $45/month for a pc and netflix.

    Like a lot of other folks I get $16/month basic cable with my rent. It beats rabbit ears.

    I know that the rich are conspiring to become more rich.

    What is new about that?

    Repubs lie and cheat and steal so that the propaganda flows.

    But damn, the middle class is paying a hundred bucks or more a month for telephone and cable and netflix and texting and twittering and songs and....

    I was paying 10% and more for my mortgage in the old days.

    Now they are paying 4% but the principle is four times or more than what I had owing.

    The computers tell the rich how to hold on and steal more.

    Our families back then consisted of five or more kids, and the suburban home had about three bedrooms.

    The CPI is going to grant me (one of those 62 SS guys) $18.00 a month increases a month!

    I guess I can purchase more tube socks in 2013! haahaha

     the end


    $18 a month!

    $18 a month!

    Richard Day is the 1%!

    Occupy Richard Day!


    hahahahaahahaha

    What can I say?

    The lottery renders many different awards to many different people!

    hahahaha


    Happy Holidays, Brother.


    I guess that with this great concept of chained CPI , the retired people are expected to switch to the Chinese rat skewers in place of beef...see both links below.

    http://www.nbcnews.com/business/bad-news-grill-beef-prices-hit-all-time-high-6C9814441

     

     

    Surprised no one has pointed out the health benefits of vegetarianism. That's a two-fer with a trap door. You're healthier. You live longer. You run out of money.

    Reminds of the meme that no one in America is poor because virtually everyone has indoor plumbing and electricity.


    INDOOR PLUMBING!

    My God is that true.

    WOW!

    I am going to write my Congressmen today!

    We just keep moving the outhouse for chrissakes!


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