Cost of Living and Social Security
Social Security retirement benefits are a target of fiscal cliff spending cut advocates. One specific proposal is to modify how cost of living adjustments are made to annual Social Security retirement benefits. I don’t get it.
Apparently, some economists believe that the CPI used by Social Security to make cost of living adjustments is not a true measure of inflation, i.e., it overstates inflation. Therefore, these cost-cutting advocates want the “chained CPI” to be used instead.
What is the difference? The chained CPI takes into account the substitutions that consumers supposedly make when prices rise. For example, assume that you are retired on a fixed income (e.g., Social Security benefits only) and like to eat pork chops once each month. Now assume that the cost of pork goes up. To manage your budget, you decide to buy more chicken because it is less expensive than pork. Therefore, according to the chained CPI, inflation has not affected you as much because you have substituted a less expensive product (chicken) for the pork you had been eating.
What if the prices of pork, beef and chicken all increase. Should retirees eat Spam instead? How about substituting ramen noodles for meat? And if you do, does this mean that you are not hurt by inflationary increases in food costs?
The segment of our society that is the least capable of compensating for inflation is our retirees. Nevertheless, the cost-cutters want to target COLA increases for Social Security benefits.
Why don’t they just admit that they want to cut Social Security benefits for everyone and stop pretending that seniors are getting a windfall from cost of living increases?
Increasing the retirement age makes more sense to me. What about you? Or maybe I don’t have a deep enough understanding of the chained CPI to evaluate its merits?
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