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Discussion: (3 comments)

  1. if you cant afford steak, and buy chicken instead, then your COLA goes down…then when you cant afford chicken anymore & buy dogfood instead, your COLA is cut again..

    1. Andrew Biggs

      This is a common misconception regarding the chained CPI, that it effectively introduces a ‘race to the bottom’ in terms of prices and the standard of living. These kinds of examples — say, that steak becomes more expensive so you buy more chicken — have that implication. But note that if chicken becomes more expensive, people will buy relatively more steak. In other words, it goes both ways.

  2. I’d actually support the chained CPI – as long as it applied to ALL pensions including military pensions.

    If it does end up adversely affecting EVERYONE – there is a much better chance that a CPI-FIX would ensue.

    We keep acting like it’s SS alone that has this problem.

    Think about this – SS is an ANNUITY. Most private and military pensions are ALSO annuities even if you think they are not.

    What that means is that from an actuarial point of view – the money on the front in – FICA taxes and Military contributions to pensions – has to be high enough to pay the CPI on the back end.

    A chained CPI makes sense only as long as it has a correcting mechanism if it goes too low.

    It ought to not pay in excess of conditions but it also ought not to fall behind either.

    if it is indexed to real world conditions, it would be fine and correct.

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