Chain, Chain, Chain …
Posted: July 13, 2011 Filed under: Economy | Tags: Chained CPI, inflation impacting the elderly 19 CommentsSo I thought I’d write a brief post on one of the topics that has come up with social security reform. That would be switching the Social Security COLA (Cost Of Living Adjustment) from the CPI-W to the Chained CPI. E
conomists widely agree that the CPI-W overstates the rate of inflation. However, there are some other considerations to look at when undertaking any change. Kevin Drum from MoJo explains the problems with the CPI-W which is an inflation index based on a fixed basket of goods and is widely criticized for having a bunch of problems including substitution bias.
The reason is something called “upper level substitution bias,” which means that instead of always buying a standard basket of goods and services, people change their buying habits over time as prices change. When the price of hamburger goes up, they eat more chicken. When the price of chicken goes up, they switch back to hamburger. A version of CPI that takes this into account is called chained CPI, and overall it’s considered a more accurate reflection of actual inflation. But technical merits aside, there are always winners and losers when you make changes to statistics like this. One big loser would be Social Security beneficiaries. Initial Social Security benefits upon retirement are calculated based on wage levels, so they’d be unaffected by a switch to chained CPI. But annual COLA increases would be affected, and they’d be lower than they are now.
Menzie Chinn at Econbrowser has a nifty graph showing the differences in three measures of inflation. The blue line is the traditional CPI that’s now the basis of the Social Security COLA. The Green line is the PCE Deflator which is a more general measure of consumer inflation that’s not attached to a fixed basket of goods. This is the measure that the Fed tends to follow. The red line is the Chained CPI.
Chinn has a general discussion of each of these indices too. The CPI basket which is used to weight price changes updates every two years now. The chained CPI uses weights that are constantly changing and more realistically reflect changes in consumer buying habits. This avoids the substitution bias.
The BLS collects the buying habits and prices of typical urban consumers monthly and provides the data in the form of the inflation indices. You can read about the chained CPI and the methodology used to calculate it here. It’s been in use since 2002. The most basic explanation of the differences is explained at the FAQ provided by the BLS.
In its final form, the C-CPI-U is a monthly chained price index with the expenditure weights varying each month. The CPI-U and CPI-W, on the other hand, are biennial chained price indexes where their expenditure weights are updated every two years. Within the two-year span, these indexes are fixed-weight series, where the changes in these indexes reflect only changes in prices, and not expenditure shares, which are held constant.
Dean Baker has some information worth considering before we suggest that the change to the chained index is the best move. Using the Chained CPI may reduce overall costs while still providing a COLA, but the index may not reflect price changes that specifically impact the elderly population in the US.
It is not clear that the Chained CPI is more accurate than the current measure. The Bureau of Labor Statistics (BLS) has found that an experimental elderly index (CPI-E), that tracks the consumption patterns of people over age 62, actually shows a higher rate of inflation for the elderly than the CPI currently used for adjusting Social Security benefits.
While the CPI-E is not a full index since it does not look at the specific items bought by the elderly and the specific outlets they use for their shopping, there is no reason why BLS could not construct a full CPI-E. If the concern is having an accurate cost of living adjustment then it would seem that you should support having Congress instruct BLS to construct a full CPI-E. For my part, I don’t know whether this measure would show a higher or lower rate of inflation than the current CPI used for indexing benefits, but it would be a more accurate measure.
As it stands, switching to a Chained CPI would undoubtedly mean a cut in scheduled benefits, regardless of whether or not it involves a more accurate cost of living adjustment. Using this measure of the CPI would reduce benefits for retirees by 3 percent in 10 years, 6 percent in 20 years and 9 percent in 30 years. We know that the vast majority of retirees are struggling to make ends meet already. Retirees are not the people responsible for wrecking the country’s economy. Social Security benefit cuts of this magnitude seem like a major step in the wrong direction.
Inflation has not been much of a problem for this country since the mid 1980s. Since we are aware that too much money chasing too few goods is the basis of inflation and the FED is committed to not letting inflation get out of hand, it’s unlikely that we’ll see problems with inflation. The only thing that would lead–at this point in my mind–to major price disruptions would be a politicized FED that abused monetary policy or some brand of gold bug craziness that put us back on a hard currency. The last problem would cause incredible, destabilizing deflation since a fixed medium of exchange in a growing economy causes the opposite problem. That would be too little money chasing lots of goods.
Probably the best thing to do at this point would be to ask the CBO to study which index realistically represents changes to the cost of living, then seeing if the savings is worth it at the aggregate level. Dean Baker has this suggestion.
The Bureau of Labor Statistics’ (BLS) Experimental Price Index for the Elderly has consistently shown a somewhat higher rate of inflation for the elderly population.
If the concern is accuracy, then the route should be to have the BLS construct a full elderly index that could take account of actual purchase substitution patterns among elderly consumers. Simply switching to the C-CPI-U without undertaking this research is consistent with a desire to cut Social Security, not to make the COLA more accurate.
This is probably a better idea since the elderly are more likely to spend more on health care where costs have been rising astronomically. They are also less likely to buy other kinds of consumer goods. A CPI based on a senior basket of goods may be more appropriate.
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Funny that you just put up a post called “Chain, Chain, Chain.” Our minds must be working in sync, because I just wrote a comment somewhere else that repeated the words “practice, practice, practice.”
Well, that’s interesting. Now I’ll read the post.
In my opinion, this is all insanity. Seniors don’t have enough to live on now. When you factor in what comes out of Social Security – Part D ($50-$100 per month), Part B ($125-$200 per month) and a supplemental plan to cover the 20% Part B doesn’t cover ($150-$250 per month) – and you also factor in the taxes we pay on Social Security income (for me, my entire Social Security income will probably go to taxes this year, since I am still working – and I can’t sustain my current living standard without working) – WHAT THE HELL IS LEFT?
Are they out of their minds? We can’t afford anything now, except the absolute necessities. Social Security needs to be raised, if they expect any money to trickle back into the economy. My god, the stupidity – not to mention the heartlessness – is staggering.
I should clarify. The money taken from the Social Security check goes to Medicare. Medicare is NOT free.
They need to get rid of that no negotiation on prices stipulation. That’s one of the big tickets that doesn’t need to be there except to subsidize big Pharma.
Dak,
It’s not just Part D. The other parts of Medicare are expensive and that money is taken off the top of everyone’s check. Then if you want to have decent health care coverage, you still have to buy a supplement–another $2,000 bucks a year. Lots of elderly people on SS are subsisting on amounts way below the poverty line.
That’s why I think Dean Baker’s suggestion is a good one. I think the elderly actually have higher cost of living increases than most people realize because of the high cost of health care. Problem is that no one other than the upper 1 – 2 percent has been getting ahead for some time now. That’s why it’s ridiculous to think that giving money to businesses is going to spur jobs. They won’t hire if they don’t have customers. The place to get customers these days is in Asia.
Of course. Our medical expenses are through the roof. What we really need is universal health care, some sort of socialized medicine. Put those health insurance companies out of business.
And, yes indeed, cat food is cheaper than chicken.
These fools, not Dean Baker, make me spitting mad. Not only are they not solving the problem, they are compounding it. Makes me wonder if that’s what they really want – us oldsters dying off quick.
Yes, they want us to die. That’s exactly what they want.
Our politicians, especially Obama et al and the Repubs, ConservaDems, are NOT INTERESTED in a more accurate understanding of the COLA as it pertains to seniors. They want a COLA which will result in lower payments over time.
As a bonus, the Chained CPI also results in tax bracket creep which will result in more people paying slightly more over time. So there’s a tax increase which no one will have to vote for.
bb – you are correct. In a discussion with a few republican associates, they are of the opinion that it’s tough luck for anyone without insurance… since they themselves pay premiums, they should get care, but folks without insurance or cash actually should be shown the door. The immorality of it frankly blows my mind… I find myself speechless when confronted with this view.
BB, a friend is visiting his elderly father in Sarasota, FL, where he has mostly well-off Republican friends. They tell my friend that they believe there should be lower taxes on the rich because they are able to make larger donations to charities if they pay less in taxes. And those charities can take care of the uninsured, unhoused, etc.
Really!
His father believes that God has shown he is a good person by showering him with wealth; If God does not smile upon the poor, it’s their own damn (literally, to him) fault. If they were good people they too would be wealthy. His own son is of questionable “goodness,” as he did not work in fields which made him wealthy.
Really.
I’m not a Christian, as you all know, but I was raised Presbyterian. To me, the entire core of the Jesus teachings can be found in the beatitudes, depending on the gospel you choose this is what I see:
From Matthew which starts with Blessed are:
the poor in spirit: for theirs is the kingdom of heaven. (5:3)
they that mourn: for they shall be comforted. (5:4)
the meek: for they shall inherit the earth. (5:5)
they which do hunger and thirst after righteousness: for they shall be filled. (5:6)
the merciful: for they shall obtain mercy. (5:7)
the pure in heart: for they shall see God. (5:8)
the peacemakers: for they shall be called the children of God. (5:9)
they which are persecuted for righteousness’ sake: for theirs is the kingdom of heaven. (5:10)
From Luke, which again starts Blessed are:
the poor: for yours is the kingdom of God.
that hunger now: for ye shall be filled.
that weep now: for ye shall laugh.
when men shall hate you, and when they shall separate you from their company, and shall reproach you, and cast out your name as evil, for the Son of man’s sake.
then, from Luke there are to the Woe unto you:
that are rich! for ye have received your consolation.
that are full now! for ye shall hunger.
that laugh now! for ye shall mourn and weep.
when all men shall speak well of you! for in the same manner did their fathers to the false prophets.
Doesn’t sound much like the Christianity practiced around the Republican neck of the woods to me, but then I’m just an apostate/Buddhist/ atheist, so what do I know other than what I was taught back in the day? I’m not seeing any thing good for the rich, the greedy, and the selfish in this list.
I was raised Presbyterian too. Simple. Do unto others. Take care of those less fortunate. Love thy neighbor as thyself.
We all die. We are thus all the same.
Dakinikat, Susie at Suburban Guerrilla, posted on Trudy Lieberman’s (no relation to the senator) new article in the Columbia Journalism Review about Joe Lieberman’s push for legislation which will cost Medicare recipients dearly.
Holy Joe often acts as a stalking horse for Holy O, so this is probably something Obama approves of. I’d love to read your take on this.
In effect it will force seniors to pay $3,750 before any Medicare reimbursement kicks in. That’s enough to cause many people to postpone needed doctor’s visits and other treatments. Which Holy Joe knows, as he believes people overuse Medicare because they buy Medigap polices which cover deductibles. He wants seniors to not use their medical insurance.
It will save on outlays, and it will cause preventable deaths.
When WILL Obama get around to initiating the Obama Self-Selection Intake Centers for Soylent Green? With the kind of choices people will have to make if his plans for SocSec and Medicare go through, at least he could offer seniors a way out with dignity. Sacrificing onesself at a OSSIC would at least result in additional protein food product for the poor and would take care of burial costs as well….
A few years ago, I decided against Medicare Parts B and D and a supplemental policy. I had gone without health insurance for 25 years and I couldn’t deal with the bureaucratic BS. I tried Part B and a supplemental policy for a couple of months ($230 per month, now it would be closer to $400 per month) and then dropped out. I still have the “free” hospital coverage. Otherwise, I pay all medical out of pocket. And when I inevitably get sick I’ll be my own death panel. It’s a lot easier. Expect nothing. Ever.
As for all this nonsense being discussed now, when Social Security has nothing to do with the deficit, I’ll say it again. They stole OUR Social Security money to fight the wars and to give the uber rich tax cuts. They put some worthless IOUs in the lock box. Now it’s time to pay up. And they are looking for a way – and they will find a way – not to pay us back. Oh, they’ll pay China and whoever else we owe – everybody except us, the true innocents who trusted the government when it gave its word. They can also bail out the bankstas several trillion times over – crooks, frauds, criminals – but, again, not us.
This is what Obama wants. He said it before he was selected, and he’s said it repeatedly since then. Cut Social Security and Medicare. And, boy, will that make a great commercial – for the other side.
Obama walks out, finally got the clue, that they want him out, he did their bidding and now they want him to move on over and out of the White House. They would only agree to a 60 days extension…
None of this surprises me — 0bowma is doing just what he said he was going to do.
Hell we didn’t even get an empathetic and hardworking first lady out of the deal.
0bowma has all the characteristics of a narcissist — he’s got his and to hell with the peasants.
About the peas — if people really want peas I expect that they will have to grown their own peas — even fresh veggies or horrid canned peas will be too expensive for the poor.
northwestrain – just when you thought that was possible, it appears a woman was arrested for growning her garden in her front yard…………guess she’ll have to be in jail to eat her peas.
I wonder how they’ll adjust the CPI when they’ve finally manage to reduce us to boiling nettles to make soup…