Tuesday, May 17, 2016

Brenton Smith: Chained CPI is Not Way To Fix Social Security

Writing at Forbes, Brenton Smith of Fix Social Security Now argues that the so-called “chained CPI” – which would pay lower Cost of Living Adjustments than the currently-used CPI-W – is not a good way to fix Social Security:

The appeal of the shift of the COLA to a C-CPI-U to the spend-less-crowd is easy to understand. It saves money. The Congressional Budget Office estimates that this policy option would save the system $116 billion over nine years. That savings comes disproportionately from those with the highest benefit levels. Moreover, supporters of the change sell it as a more accurate measure of inflation than the current index used. If you listen long enough, the solution not only makes the system more stable, but actually improves the inflation adjustment process.

The problem is that C-CPI-U is not a better measure of inflation.  The index does not even measure true inflation. It actually measures the cost of living, which in part reflects the behavioral response to inflation.

Click here to read the whole piece.

I’ve generally opposed the Chained CPI, as it imposes the largest benefit cuts on those who are least able to work and most reliant on Social Security, while sparing “young” retirees who could probably work longer.

That said, I feel myself shifting… I think there’s pretty solid evidence that retirees voluntarily reduce spending over their retirement, even if they have plenty of money. (Health care expenses in very old age are an exception, but don’t seem to negate the trend entirely.) If that’s the case, then a more frontloaded real Social Security benefit level isn’t as much of a problem.

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