October 25, 2015
A Washington Post editorial arguing for the adoption of a budget proposal put forward by Representative Scott Rigell applauded the plan’s call for using the chained CPI for indexing all taxes and benefits, including Social Security. It described the chained CPI as “more accurate.”
The chained CPI will typically show a lower rate of inflation than the CPI currently used since it accounts for substitutions in consumption, as people change their consumption patterns in response to changes in prices. (It changes the weights in the index assigned to different price increases, it doesn’t count savings from switching from more expensive to less expensive items.)
While there is an argument for picking up the impact of substitution, it is important to note that this may not be valid for the senior population that relies on Social Security. It is possible that seniors are less likely to change their consumption patterns by switching items or outlets in response to price increases. We could determine whether or not this is the case by constructing a full price index for the elderly, which would track the prices of the specific goods and services they consume and look at the outlets where they buy them.
This is what Congress would do if it was interested in an accurate measure of the rate of price increase experienced by seniors. Switching to the chained CPI will mean lower benefits (@ 3 percent for the average senior over the course of their retirement), the Post has no clue as to whether it would be more accurate.
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