The Money Illusion
Excellent point from Kevin Drum on the Social Security COLA issue:
Still, this does go to show the power that sustained inflation holds on our imaginations. Technical arguments about CPI calculations aside, the fact is that seniors haven’t gotten a benefit increase for decades. It’s just not the way the program works. But the fact that their checks keep going up makes it seem like they have. So now, despite the fact that the huge benefit increase of last January combined with the deflation of the past 12 months means seniors really are getting higher benefits for the first time in recent memory, it doesn’t seem like it. So adjustments must be made and appearances kept up.
It is quite striking, the one year congress will intervene to give seniors a real increase in benefits is the year in which they were getting a real increase anyway. At any rate, the one-off bonus is pretty silly but even Tyler Cowen agrees that on net it’s probably fine public policy.
This is a reminder, however, that technical determinations about the inflation rate play a large role in budgetary issues. There are any number of ways of calculating the inflation rate, and even though people sometimes debate them as being better or worse, I think if you examine the issue for a little while you’ll swiftly reach the conclusion that there’s no such thing as a “true” inflation rate that different formulae are doing a better or worse job of calculating. From a hedonic point of view, relative price shifts inherently impact different individuals differently. What you really have is a range of credible approaches that make the inflation rate look higher or lower. And you can alter the long-run budget situation by switching various programs from one formula to another.
In recent years the most common proposal along these lines has tended to come from the right. You could start indexing the Social Security COLAs to a formula that shows a lower inflation rate (by accounting for substitutions—if the price of pork skyrockets but the price of chicken stays flat, most people just eat more chicken they don’t see skyrocketing food costs) and this would reduce Social Security expenditures. At the same time, Social Security benefits aren’t the only thing the federal government does that’s indexed to inflation. The cut-off points for the income tax brackets are also inflation adjusted. Before Ronald Reagan, that didn’t use to be the case. Consequently, there was a strong tendency for real tax rates to just go up over time. That allowed congress to regularly appropriate nominal tax cuts even while, objectively speaking, public revenue was growing. Since people are easily confused by inflation that was a boon to progressive policy. Congress changed that in the early 1980s. But if we shifted the tax indexing to one of the versions of the CPI that shows a lower inflation rate—for example, the aggressive C-CPI-U formula—we’d recapture some of that dynamic.
18 Responses to “The Money Illusion”
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October 16th, 2009 at 10:56 am
on an individual basis, whether or not a senior has received a benefit increase depends on how the senior’s spending pattern stacks up against the weighting in the CPI. I have no idea whether the CPI formula overweights or underweights “stuff seniors like,” but it’s certainly possible an annual CPI adjustment could actually result in increased purchasing power for many recipients of social security benefits.
October 16th, 2009 at 11:04 am
Not sure what Drum means by the statement you bolded: “the fact is that seniors haven’t gotten a benefit increase in decades.”
Does he mean that the COLA doesn’t accurately reflect “real” inflation, which he thinks is much higher? If so, I don’t know why he prefaces by saying: “Technical arguments about CPI calculations aside”.
October 16th, 2009 at 11:11 am
[...] Update: Here are some intelligent thoughts on the COLA from Drum and Yglesias. [...]
October 16th, 2009 at 11:16 am
It’s probably good to point out that the absurdly low savings interest rates of the past 8 years have crucified retirees.
October 16th, 2009 at 11:18 am
First, I’m not sure why they need an increase.
That aside, I think if we’re gonna start a battle in Congress over raising the cap to provide a lousy one-time $250, we should talk about doing it permanently to plug the hole in the trust fund.
(Also, it’s not only seniors that receive SS.)
October 16th, 2009 at 11:19 am
WTF, most of the employed population hasn’t seen a real increase in decades either. Why not give them $250? This is just stupid pandering to the AARP.
October 16th, 2009 at 11:26 am
WTF, most of the employed population hasn’t seen a real increase in decades either. Why not give them $250? This is just stupid pandering to the AARP.
If that pandering helps with health care reform, then its cheap, and money well spent.
October 16th, 2009 at 11:28 am
It’s probably good to point out that the absurdly low savings interest rates of the past 8 years have crucified retirees.
Try the last 15 or so years. Interest rates have been absurdly low since the mid-90s.
October 16th, 2009 at 11:43 am
Well, Little Matty admits that the effects of that magic progressive elixir, monetary dilution (robbing from those holding the existing money,) is hard to measure.
No shit, Sherlock.
October 16th, 2009 at 11:45 am
Does he mean that the COLA doesn’t accurately reflect “real” inflation, which he thinks is much higher?
Imagine the benefit as a promise to buy someone a meal every day. Because of inflation, the cost of that meal will increase over time, even if the recipient still just gets one meal per day. The nominal payout increased, but the benefit didn’t.
The point here is that because of deflation there was an actual INCREASE in the benefit (because the meal is cheaper today, but the nominal payout stayed flat). But no one thinks about inflation, so the $250 is a way to show steadily increasing benefit, when deflation took care of that invisibly.
October 16th, 2009 at 11:51 am
Whatever the rationale for the $250 increase the timing is actually excellent. The more of these back-door stimuli that Congress can provide to the public while we are still economically fragile the better. In this case I’d expect Social Security recipients to quickly put that $250 right back into circulation.
October 16th, 2009 at 12:02 pm
i think it’s a stretch to say “even Tyler Cowen agrees that on net it’s probably fine public policy”
he said the effect would probably be ok but it’s also clear he doesn’t approve of what was done.
maybe that’s just nitpicking but i think “fine public policy” conveys a little more than “on balance the effect might not be bad”
October 16th, 2009 at 12:22 pm
I don’t really get the substitution effect argument for calculating inflation. If people start eating dog food because they can’t afford human-grade meat, are they really not feeling the effects of higher meat prices?
October 16th, 2009 at 12:24 pm
Matt: “substitutions—if the price of pork skyrockets but the price of chicken stays flat, most people just eat more chicken they don’t see skyrocketing food costs”
I’ve always been a little dubious about this argument, mostly because it gets re-applied over time – that is, next month when chicken goes up and pork is the same, the argument is made that people will just switch to pork and see no increase. The math for a single month may be impeccable, but it’s not additive.
There’s a version that assumes there’s always a cheaper substitute, but that runs into the problem of the finite number of different foodstuffs. Or, to put it another way, if we were eating pork in 2001, what are we now eating that’s 100 steps down from pork?
October 16th, 2009 at 12:24 pm
what is this deflation of which we speak? Other than gas – and many seniors don’t drive, remember, what else has gone down so substantially and prevalently that suddenly we’re just taking the fact that deflation is pervasive as a given?
October 16th, 2009 at 1:23 pm
I believe that in budget wonk speak, these downward-adjusted COLA projections are called “diet COLAs”
October 16th, 2009 at 3:55 pm
Couple of things wrong here.
First, SS recipients have already “substituted” to keep their costs down. That’s what you do when the average SS payment is around $1000 and the cost of everything keeps going up.
Second, the COLA has a “family of four” bias that emphasizes stuff like milk, which is price-stabilized by the government. Seniors buy things like drugs, which aren’t. One prescription can cost over $200. and those prices go up at 10-20% per year. Medicare part B and Part D will probably also go up by almost 10% like they did last year. Gas is up 40% over the past six months.
Of course, what goes around, comes around. While you’re hating the elderly, remember you will be old yourself- in fact, somebody already thinks you are.
October 16th, 2009 at 6:16 pm
I’ll be old myself one day, and I won’t be eligible for SS benefits until age 70. And benefits will likely have been cut–or the retirement age raised again–as the system becomes underfunded, and Medicare may not have any money left to pay benefits at all. The fact that Congress has shown a clear intent to cut back for future retirees to maintain full benefits for current ones, makes it damn hard to feel solidarity between current and future retirees. They’re already getting a much better package than anyone entering the workforce can expect.
Last time the fix was to increase payroll taxes on present and future workers, then raise the retirement age for those same workers–all as those close to retirement got massive tax cuts. The retired or soon to retire didn’t share the pain at all, even the wealthy ones. And most of the elderly like that just fine–they want the Republicans to gut us even more for tax cuts.
This reminds me of the CA teachers union demanding across the board raises every now and then–they haven’t gotten one in so long!–when they’ve got a guaranteed annual COLA and the highest pay in the country.
Even so if the tax only applies to high incomes then I don’t give a shit–it’s a half-decent redistribution and I won’t be paying it. But the way it’s all coming about does piss me off.