A social security card on a bed of money

The Serious People are after your social security.

The Very Serious People have taken off the gloves. There are no rules when it comes to the battle over Social Security and Medicare as Brooks Jackson shows in his “FactCheck” on the use of the chained CPI to index the Social Security cost-of-living adjustments (COLA).

Jackson strongly endorses the use of the chained CPI, describing it in the first sentence as “a more accurate cost-of-living adjustment.” The chained CPI would have the effect of reducing the annual COLA by approximately 0.3 percentage points. This reduction would be cumulative (e.g. 3 percent after 10 years, 6 percent after 20 years), leading to an average cut in lifetime benefits of approximately 3 percent for the typical beneficiary.

To push his case, Jackson seriously misrepresents the evidence. There is reason to believe that a chained index provides a better measure of inflation, since it takes account of the substitution between goods. However, the Bureau of Labor Statistics (BLS) has been producing an experimental elderly index (CPI-E) for almost three decades, which has generally shown a somewhat more rapid rate of inflation that the standard CPI currently being used to index Social Security benefits. The CPI-E would imply that the current COLA has been underadjusting for inflation, not overadjusting.

Jackson notes the CPI-E, but dismisses it as:

an unpublished, ‘experimental’ index

He then cites BLS’s warning that:

any conclusions drawn from it should be used with caution.’ BLS also concedes that the CPI-E has a number of shortcomings because it simply re-weights the price data collected for its regular price surveys, without attempting to collect some important data specific to seniors.

Given that this experimental index has shown evidence that the elderly see a higher rate of inflation than the population as a whole, it would seem that anyone concerned about having an accurate measure of the rate of inflation experienced by the elderly would want to see the BLS construct a full CPI-E. In fact, several hundred economists recently signed a statement calling on BLS to construct such an index. This would be the obvious route to go for anyone interested in an accurate index for the inflation adjustment of more than $10 trillion in Social Security benefits over the next decade.

In addition to belaboring the obvious, that the CPI-E is an experimental index, Jackson also misleadingly presents evidence. He tells readers;

“Another shortcoming [of the CPI-E] that BLS readily admits is that the “elderly” index takes no account of “senior discounts” available on such purchases as movie tickets, car rentals, train tickets, public transportation, chain restaurants and so forth.”

While Jackson presumably wants readers to believe that this omission means the CPI-E would overstate the rate of inflation seen by the elderly, that implication does not follow. It is true that the elderly are eligible for certain discounts, which means that they would face lower costs on the discounted items than other consumers. However, the CPI is not measuring levels of prices, it is measuring changes in prices.

This means that the relevant factor for purposes of calculating the rate of inflation seen by the elderly is whether senior discounts are getting larger or smaller through time. The fact that such discounts exist tells us zero about the rate of inflation seen by the elderly.

Jackson also notes that the recent slowing of health care costs has caused the gap in the rate of inflation shown by the CPI-E and the standard CPI to disappear in the last few years. [The weight of health care in the CPI-E is close to twice as large as its weight in the standard CPI. More rapid growth in health care costs is the main reason that the CPI-E has shown a higher rate of inflation than the standard CPI.] While this is true, Jackson failed to draw out the logical implication of this comment.

If the slowdown in health care costs continues, then the official projections of spending on Medicare, Medicaid, and other health care programs are hugely overstated. These projections assume that health care costs will increase far more rapidly than the overall rate of inflation. This means that either projections for government spending on these programs are overstated, and therefore projected deficits are overstated, or alternatively the closing of the gap in the inflation rates shown by the CPI-E and the overall CPI is temporary.

In other words, if the projections of large future budget deficits are accurate, then the CPI-E will show a higher rate of inflation than the overall CPI. This is not the only situation where Jackson fails to acknowledge the implications of his own claims. He also cites the Boskin Commission report that claimed that the official CPI overstates the true rate of inflation by 1.1 percentage point annually. (A 2000 survey of surviving commission members by the Government Accountability Office put the annual overstatement at 0.8 percentage points, after the BLS had made a number of changes in the CPI.)

If this overstatement is true, it means that living standards are rising much more rapidly than our data show and that official projections imply. For example, instead of average real wage being 1.1 percent annually, if the Boskin Commission is correct, average annual real wage growth has been almost 2.0 percent. This implies that young people will be far wealthier than we imagined. In 2042, the average real wage will be close to 80 percent higher than it is today.

This should hugely impact how we view intergenerational equity issues, since the Boskin Commission’s claim on the overstatement of inflation also implies that older people were much poorer growing up than our data show. (If wages and income have been growing more rapidly than our data show, than the levels in the past would be lower than our current data indicate.) It would be rather perverse to use evidence showing that the elderly were poorer than we believed and the young will be richer as a rationale for cutting benefits for the elderly, ostensibly to improve the plight of the young.

The concluding statements in this “factcheck” are simply illogical. It tells readers:

We take no position here as to whether benefits for seniors are too high or too low, whether future cost-of-living adjustments should be higher or lower, or how income-tax brackets should be adjusted in the future. …

But it’s just a fact that leading economists have said for many years that the current CPI overstates the true rate of inflation. So using it to index federal programs produces more spending and less revenue than a more accurate measure would justify.

The assertion in the last sentence that using the current CPI to adjust benefits, “produces more spending and less revenue than a more accurate measure would justify” is clearly taking a position on “whether future cost-of-living adjustments should be higher or lower.”

Again, there is a simple answer for those who want a cost-of-living adjustment that accurately measures the rate of inflation for the elderly: have BLS construct a full elderly index. Brooks Jackson instead used FactCheck to argue for a reduction in Social Security benefits.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.

Photo by 401K 2012 released under a Creative Commons Share Alike license.