Friday, May 21, 2010

Who’s Right on Social Security COLAs?

U.S. News and World Report's Luke Mullins asks, "Are Seniors Getting Shafted on Social Security?" – in particular with regard to the size of annual Cost of Living Adjustments (COLAs). It's a good article that I think reviews both sides of the CPI/COLA argument pretty well.

I will say this, though: I think that CPI skeptics (in this case, me) try to give a somewhat more rigorous treatment of the issue than do those who are arguing that seniors, well, are getting the shaft by not receiving higher COLA payments. Here's the section of the article highlighting my take on things:

Andrew Biggs, a resident scholar at the American Enterprise Institute, argues that while CPI-W fails to appropriately capture seniors' rising healthcare expenses, it includes an additional error that works in their favor. When the price of apples goes up but the price of oranges goes down, he explains, consumers tend to buy fewer apples and more oranges. But because the CPI-W assumes that people buy the same number of apples even as prices rise, the index overstates inflation. "These groups and members of Congress are focusing on one error while ignoring the other one," Biggs says.

Ok, and here are two quotes from advocates of higher COLA payments:

"Try telling a senior that the cost of living hasn't gone up,' [New York Democratic Rep. Elliot] Engel says.


"We can't let our citizens not be taken care of. Otherwise, that is the beginning of the end for our country," [National Committee to Preserve Social Security and Medicare President Barbara] Kennelly says.

I'm not say they don't have some facts on their side – after all, I acknowledged that the CPI-W used in calculating COLAs doesn't fully capture rising health care costs for seniors. What's a little wearying is that there isn't that much attempt on the other side to really even use facts. If our only measure of whether the cost of living has gone up is to ask seniors, can't we just shut down the Bureau of Labor Statistics and save a lot of cash?


coberly said...


I agree with you that the complaining about the COLA is "wrong" (shorthand for i don't agree with it). If there is a problem with the CPI for seniors it should be fixed, but it would be very bad policy to just ignore it and give the seniors a cost of living increase when the CPI does not call for it. If some seniors need a boost in income, they should get some kind of welfare supplement. It is not Social Security's business to solve every financial problem that old people might have. SS does what it does very well. Treating it like welfare is a good way to destroy it.

On the other hand, you ought to know that if the price of oranges goes up, the price of oranges goes up. I may not want an apple. I think economists in general understand this.

Oh, oh, I can feel it coming on.... I think if you were honest you would not imply that while the price of oranges is going up the price of apples is coming down. you know that is not true. the price of food in general is going up, and the price of other things that seniors are more likely to need than diamonds or vacation homes is also going up. though of course you and Mike Boskin can see how a person would switch from food to diamonds in order to keep his cost of living constant.

Andrew G. Biggs said...


You make a good point, which raises why measures of consume prices aren't true measures of the 'cost of living,' which is more of a welfare index. Put another way, there is a welfare loss when the rising price of oranges compels you to switch to apples. I don't think any economist would deny that. What they would say, though, is that the size of this welfare loss isn't nearly as big as if you didn't adjust for changing purchasing habits and simply assumed that people continued to purchase oranges at the higher price. If the welfare loss from switching were lager, people wouldn't do it. So we pretty much know that not adjusting for changing purchasing habits overstates the cost of living, we just don't know by precisely how much.

Anonymous said...

Just do it!.......................................................

Anonymous said...

Efforts to fight fuel!........................................................

coberly said...


good that we can agree about something.

We should also admit that "cost of living" is unlikely to ever be measured "correctly." All we can do is look at the experiences of people who are relying on a "cost of living index" from time to time and see what is happening to them, and if politically we want to adjust the way we measure "cost of living" to satisfy our own sense of decency (note i avoid the term equity, or fairness, though those concepts will no doubt enter into our private calculations).