Photo: illuminator999I’m getting a 3.6 percent increase in my Social Security retirement benefits on January 1. This reflects the rise in the “cost of living.” I’m happy for the money, but it’s wrong: every economist who has studied the issue knows that the Consumer Price Index (CPI-U) used for this adjustment overstates inflation by failing to account for the fact that people substitute away from goods and services whose prices rise relatively rapidly.
For a decade the U.S. Bureau of Labor Statistics has published a measure that accounts for this substitution, the chained CPI (C-CPI-U). Over the last 10 years it has risen 24.4 percent, while the CPI-U has risen 27.4 percent (and 3.7 instead of 3.9 percent this past 12 months). The C-CPI-U is a better measure of the cost-of-living, and it should be used (although even it overstates inflation because it doesn’t account fully for improvement of products).
Unsurprisingly, groups claiming to represent us greedy geezers are vehemently against even this change, “This so-called ‘chained CPI,’ through compounding, would cut seniors’ benefits by thousands of dollars over their lifetimes ….,” said AARP Executive Vice President Nancy LeaMond.
Of course, nobody’s benefits would be cut. Rather, their future benefits would rise less rapidly and would reflect better the prices of the goods they consume. My advice to other geezers: suck it up—this is the right thing for society and the right thing logically.
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Daniel,
I think we should tax any Social Security benefits you receive at 100%. You don’t need it AND you’re just going to save it anyway. You’re making over 100k/yr and have a pention guaranteed. I think it’s time that you started paying your fair share. Do the right thing for society!
“if you want to balance budgets surely taxes should be raised on those with high propensities to save (arguably the well-to-do) and reduced on the rest of society, so as to stimulate consumer demand. ” – Daniel Hamermesh
Hot debate. What do you think?
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Exactly, those greedy seniors don’t need to eat steak, they can just eat hamburgers. Oh, and that nice safe Chevy Impala they’re driving.. screw them, make them buy an Aveo…
Dave, you should consider going into politics, given your obvious skills at simplifying and distorting an issue. Scaring seniors with such simplistic, misleading and downright wrong rhetoric is a proven path to elected office.
Well-loved. Like or Dislike:
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Don’t worry Dave, seniors don’t go online they’re never see this…
Actual Inflation can only be tracked by comparing apples to apples, such as the price of a Big Mac in 1980 vs. the price of a Big Mac today. Substituting Chicken McNuggets (yechhh!) is cheating. Real inflation, as measured by http://www.shadowstats.com, is currently running at 8.5%. Therefore, retirees are being cheated by the federal government out of the Social Security they would have received if the government were honest and tracked inflation honestly.
You are unclear on the concept. If you think even a government conspiracy theorist like yourself is going to keep buying overpriced Big Mac’s when moderately priced McNuggets are equally yummy then you are mistaken. You don’t understand economics or human nature.
Ur comment shows youth or ignorance..those pple who depend on soc sec already subsist and substitue . Where is ur evidence. without a means test or Irs data 2 contrary u can bet and shld assume that Many of these are pple living on eggs not chicken or steak.They r not eating in capital grille or out at all. What a disgraceful stmt and unsupported assumptions u make. they shld b able 2 hav sum steak.
Absolutely they should be able to have steak…that’s why they should be saving for retirement so they can afford it.
Social Security was never intended to provide retirement income for 30 years at a time. It was intended as a stop-gap during the Great Depression, and now we’re stuck with it, even though it’s bankrupting the government. I guess making any reduction is out of the question…until China stops loaning us money and the payout rate drops to zero.
My understanding is that SS payment inflation is based on WAGE inflation not CPI.
Madical inflation is not properly accounted for older people, where more of the income is spent. Even if forgoing medical services may be the substitute.
Suppose we have two products considered to be equivalent, and the difference in their price varies randomly month-to-month while the mean price rises at a steady rate. If, for each month, you use the lower of the two rates, your compounded rate of change will be less than the rate of change of the mean price.
Furthermore, in other explanations of the process I have seen, there is no attempt to identify equivalent products (unsurprisingly: no two people would agree on the equivalence of whole baskets, anyway.) The process simply measures the change in purchasing behavior, and in times of stress there is good reason to believe that many purchasers consider some of the substitutions they make to be inferior.
I’m correcting my own mistake here – I should have referred back to the original post. The concept of equivalence in substitution did not originate there, it was introduced in Sam’s comment and perpetuated in other comments (including mine) that followed.
Reconsidering my scenario under the actual process used to create baskets, and assuming that everyone always chooses to buy the lower-priced of the two products (realistically, the average behavior will be somewhere between this and no change in purchasing behavior), then the index will track the lowest price in each month. Perhaps a freakonomist could explain how it works out in a more realistic scenario.
I am not taking a position here on whether or how social security should be inflation-adjusted, I am interested in understanding how it actually works.
This is wrong. Government CPI figures leave out the cost of fuel and food in their statistics, and for good reason. It’s politically expedient for administrations to under report the CPI in order to boost consumer confidence. Every president since WWII has manipulated unemployment statistics, and inflation rates for purely political reasons.
Mr. Hamermesh, I’m not sure if you do any of the shopping in your household, I would guess not, based on your comments, but if you did, you’d realize that the prices of many products have risen 20% in the past year alone. You’d also know that store brands have also greatly increased for at least the last 3 years. Today’s store brand prices are still higher than last year’s name brand prices, yet wage levels for most people are stagnant, or even lower, in some cases.
Additionally, some manufacturers have not only drastically increased their prices, they’ve also decreased the size of their product. Examples would include cereal and ice cream. Today’s cereal comes in less quantity, yet sold in the same sized boxes. In the case of ice cream, most cartons previously held 2 quarts, yet now only contain 1 1/2 quarts.
In my own home, my electricity bill has gone from a seasonally-balanced $65 two years ago, to $185 today.
I saw Bill Clinton in an interview recently, where even he admitted that the true inflation rate is closer to 9%.
If you’re going to comment on the cost of living, sir, you should at least do your homework, and consider all of the facts. As for my Social Security, I badly need that 3.6 percent increase, especially in light of the fact that benefits have not increase in 2 years.
As for your snarky comment about geezers “sucking it up,” you apparently are in a much better financial position than most of us. My working years were cut dramatically short at 47 years of age due to a traumatic brain injury resulting from a stroke. I have precious little retirement saved up, and my wife and I will pretty much have to subsist off of Social Security in our retirement, assuming I live that long. “Sucking it up” is obviously a lot easier for some, than others. Your statement is naive and insulting.
Additionally, the Social Security system would not be in the shape it is in today, if the government had kept their fingers out of the SS trust fund. And the system could easily be saved if they got themselves out of it now.