February 15, 2013
Like the global warming deniers, proponents of basing the Social Security cost-of-living adjustment (COLA) on a chained CPI are scared to death of data. They are all anxious to assert that the chained CPI is a more accurate measure of the cost of living and therefore it should provide the basis for the COLA. However, they have no research on which to base this assertion.
There is research showing that the chained CPI is a better gage of the cost of living for the population as a whole. But we know seniors have substantially different consumption patterns than the population as a whole. They tend to consume more housing and health care and spend less on new cars, computers, and smart phones. The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index that shows seniors experience a higher rate of inflation than the population as a whole.
It also has conducted research on the size of the substitution bias that the chained CPI is supposed to eliminate. This research shows that the substitution bias differs by income group and for those receiving benefits like Supplemental Security Income and Temporary Assistance for Needy Families (TANF) it was essentially zero. This may well prove to be the case with the larger Social Security population as well. If the goal is to have a more accurate COLA for seniors then the remedy is simple; have the BLS construct a full elderly CPI and see what it shows.
While no one knows what a full elderly CPI will show, we do know that switching the COLA to a chained CPI will reduce lifetime Social Security benefits by an average of about 3 percent. This doesn’t raise a huge amount of money, but it would be a big hit to seniors, 70 percent of whom rely on Social Security for more than half of their income.
For those who find it more politically practical to take money from moderate income seniors than high income taxpayers (for example as a mechanism for funding pre-K education) switching the basis for the COLA to the chained CPI can serve a very useful purpose. But let’s be very clear, this is just about cutting Social Security benefits. The chained CPI has nothing to do with accuracy.
