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Discussion: (6 comments)

  1. re: ” he all-inclusive COLA fix would cut Social Security’s 75-year deficit by around 19%, while exempting disability benefits would reduce the shortfall by only around 16%”

    How many other budget items have a budget horizon of 75 years? How about DOD health care and pensions? Are they look at 75 years ahead?

  2. I believe changing COLA to chained CPI might be regressive, and for a reason I have not yet seen raised.

    Consider purchasing power. The very concept of chaining assumes that consumers will substitute cheaper goods for the goods they purchase currently.

    But a person receiving a low Social Security benefit is likely to be lower on the substitution chain than is a person receiving a higher benefit. Persons near the bottom of the benefit structure may well already be at the bottom of the substitution chain – with NO further substitution option.

    The lower a recipient is on the substitution chain, the lower their real purchasing power – the greater the real cut in benefits – will be under chained CPI.

    Conversion to chained CPI will effect a pure cut on the benefits and purchasing power of those recipients at the bottom of the substitution chain

    1. Andrew Biggs

      Terry, Chaining also means that people substitute more expensive goods for cheaper ones, since it’s about relative prices. Yes, if beef prices rise then people will buy more chicken; but if chicken prices rise, then people will buy more beef. On important question, I’d think, is how prices tend to change for staples (like chicken) and their more expensive substitutes (like beef). My guess — and it’s only a guess — is that the more ‘luxury’ goods tend to fall in price, at least in relative terms, but I don’t know that for sure.

      1. According to Mortgage News Daily, just about half of all low-income renters spend at least half their income for shelter.

        This is (obviously) the largest item in these people’s spending, and they are also likely to lack cheaper substitution options for housing.

        For example, I am over 50 (thus with a short horizon for retirement age), earn minimum wage, and rent a room. Exactly what substitution am I expected to make for housing? I don’t have any cheaper available substitutes and will lose purchasing power under chained CPI.

        1. Andrew Biggs

          Terry, the chained CPI should show lower inflation in cases where people can (and do) substitute between goods. If you’re right that it’s hard to substitute within housing, then the chained CPI shouldn’t show a large change there.

          1. People with middle class incomes CAN substitute within housing, those financially constrained to the point of renting rooms cannot substitute within housing.

            Also, are homeowners relatively advantaged and renters relatively shortchanged under cost of living adjustments tied to CPI (chained or not)?

            Homeowners with fixed-rate mortgages have locked in their P&I payment and thus are immune from cost increases in this component when housing prices rise.

            Renters, on the other hand, must always pay current rents, which at most times are rising, and which often rise much faster than CPI.

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