Chained CPI: Political, Not Technical

Moneybox
A blog about business and economics.
July 30 2012 11:58 AM

There's Nothing "Technical" About Changing the Cost-of-Living Index

Bill Keller for various reasons wants to reduce Social Security and Medicare benefits, and one way to achieve the former is to stop pegging annual increases in nominal benefits to the Consumer Price Index and start pegging them to the slower-growing chained CPI. Another feature of using chained CPI is that since tax brackets are indexed to inflation, doing the switch comprehensively would constitute a de facto tax increase.

This is perhaps a good idea and perhaps a bad idea, but these certainly aren't what Keller says they are "technical fixes like aligning the automatic cost-of-living formula with reality."

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The difference between the two indexes is basically this. The traditional CPI says that if corn gets more expensive, then chicken feed gets more expensive, then chicken gets more expensive, so the cost of living increases. Chained CPI observes that in practice if chicken gets more expensive, people aren't going to just sit around crying into their fajitas. Some people will start eating less chicken and eating more Beyond Meat, so really the "cost of living" hasn't gone up as much as an unchained index would say. There is genuinely no right or wrong about the question of which is "the best" index to use. To the extent that you want to insulate people from the need to make lifestyle compromises in response to price increases, you should use the unchained CPI. To the extent that you don't, you should use the chained CPI. But that's just a way of saying that if you want a generous program, you use the generous benefit formula. If you want a stingier program, you use a stingier formula.

Keller starts his piece out by making a case for stinginess. Spending money on bolstering the living standards of old people, he says, is a waste when we could be spending that money on investments and infrastructure and such. If your policy goal is to reduce the living standards of the elderly, then you accomplish that by reducing the living standards of the elderly not through "technical fixes." Switching to chained CPI fits the bill, but it's a political question not a technical one.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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