What the Chained CPI Debate Tells Us About the Politics of Entitlement Reform

If you’re following the fiscal cliff negotiations, you’ve probably heard about the plan to change the way Social Security calculates its benefit payments by using the inflation measure known as "chained CPI" rather than the current CPI (consumer price index) measure.

There argument over the change goes roughly as follows: Supporters say we should switch to chained CPI because it is a better, more accurate measure of inflation, and would save money over time. The opposition says in return that switching to chained CPI would represent a cut in Social Security benefits.

Many economists on both the left and the right consider chained CPI a more accurate gauge of the cost of living. Right now, Social Security’s benefits (as well as federal pensions and military benefits) are indexed to inflation measured by looking at a fixed basket of goods, measured on a monthly basis. But here’s the thing: When certain goods grow more expensive, consumers don’t necessarily just continue to shell out more. Instead, they switch to cheaper, mostly equivalent goods. What chained CPI does, then, is attempt to account for the way consumers switch to cheaper goods by looking at purchasing changes over time and linking — or "chaining" — two consecutive months of data together.

As the Congressional Budget Office noted in a 2010 report, measuring chained CPI is actually kind of hard for a variety of technical reasons, and benefits would end up indexed to a preliminary estimate of chained CPI. Still, even if it’s a bit imprecise, the overall effect would be to calculate increases in Social Security payouts in way that more accurately reflects consumer behavior. And over time, it would restrain the growth of Social Security, reducing planned spending on the program by about $145 billion over a decade, and more over time.

Which is precisely why Social Security’s defenders are concerned. They argue that the potential savings constitute a benefit cut. That’s not quite right: Instead, benefits would simply grow somewhat more slowly than if we stuck with the current inflation measure. Over the next decade, chained CPI would grow 0.25 points more slowly than the current inflation measure, according to the CBO.

The gravitation toward chained CPI, and its prominent place in the fiscal cliff negotiations, tells us a lot about why budget reform is so hard. The long term budget problem is, more than anything, an entitlement spending growth problem. And while Social Security is not as big of a problem as Medicare, it’s still a contributing factor. Yet restraining the growth of our big entitlements is so unpopular that politicians have had to resort to technical tweaks that aren’t widely understood. And even then, those tweaks, designed to modestly slow spending growth, are decried as cuts. 

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  • robc||

    Both CPI and chained CPI are horrible measures of inflation. The best available measure would be change in M2.

    Inflation is monetary.

  • robc||

    Current inflation rate(year over year change in M2) is between 7.0 and 7.5%.

    http://research.stlouisfed.org/fred2/graph/?id=M2

  • robc||

    I SFed the link, but cant seem to fix it.

  • pmains||

    Looks fine to me.

  • robc||

    I was trying to link to the change in M2, not to M2.

  • pmains||

    Haven't they also been massaging the CPI formula for years to under-report inflation (as understood as the price increases which result from monetary inflation)?

  • Cliché Bandit||

    while I wholeheartedly agree, there is still some value in a CPI type metric for the practical effects of inflation. In my opinion however I think a basket of raw materials is the most accurate with a heavy influence from PMs and NPMs.

  • robc||

    I have no problem with also measuring price inflation, but for purposes of things like SS increases, lets stick to monetary. The practical effect isnt just in buying stuff. Its also in investment and saving and etc. So M2 is the real practical measure.

  • Cliché Bandit||

    again, no disagreement here. Just making sure the value of other metrics is not discounted because of their poor use today.

  • robc||

    Yeah, measure anything you want. Then know when to apply which ones.

  • Cliché Bandit||

    correct

  • Invisible Finger||

    Pretty much correct. What they're REALLY doing with CPI is selective default.

  • GroundTruth||

    I'm *not* up on the finer points of M2, but doesn't M2 include all money supply, thus, include growth of the economy plus population? If this were so, would M2 actually overestimate inflation?

    Please correct me (nicely) if I am wrong.

  • robc||

    M2 is a measure of the money supply, it has nothing to do with population.

    From Wikipedia, M2: Represents money and "close substitutes" for money. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions.

    M3 might be a better measure of the amount of money in circulation, but the US Gov no longer tracks it.

    The "money multiplier" is generally defined as M2/M0.

  • robc||

    Also, M2 cant overestimate inflation, the change in M2 IS inflation (unless you want to define inflation with M3 or something).

  • sarcasmic||

    From http://www.bls.gov/cpi/cpifaq.htm#Question_7


    FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
    HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
    APPAREL (men's shirts and sweaters, women's dresses, jewelry)
    TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
    MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
    RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
    EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
    OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

    Funny how they exclude GASOLINE! Golly, it's not like most people spend a chunk of change on GASOLINE every fucking month! Or what about ELECTRICITY? Fuck!

    "Figures don't lie, but liars figure."

  • nicole||

    What? Gasoline is under transportation.

  • ||

    There has been too much violence, nicole. Too much pain. But I have an honorable compromise. Just walk away. Give me your pump, the oil, the gasoline, and the whole compound, and I'll spare your lives. Just walk away and we'll give you a safe passageway in the wastelands. Just walk away and there will be an end to the horror.

  • ||

    You can run, but you can't hide!

  • BakedPenguin||

    Look under "Transportation".

  • sarcasmic||

    Guess I need to learn to read.

    derp!

  • nicole||

    I hear tell the state can help you with that. At least, they could if it weren't for all those pesky "spending cuts."

  • sarcasmic||

    You kidding? It was the state that taught me how to read!
    (actually it wasn't, my parents got me hooked on phonics at a young age... problem is that English isn't very phonetic... that took a long time to unlearn...)

  • ||

    Fun tidbit: The most literate kid I know, a ten-year-old whose vocabulary and grammatical maturity is larger than most writers of modernity, was homeschooled.

  • ||

    In contrast to me, for example, because I do stupid shit like using "is" when an "are" is necessary.

    Need caffeine.

  • nicole||

    Stop stealing my dad, sarcasmic!

  • ||

    Wasn't it established a few weeks ago during a Star Trek discussion that you and Sarcasmic are actually siblings who were separated at birth?

  • ||

    Yes, their mother is Lwaxana Troi.

  • nicole||

    My mother is not unlike Lwaxana Troi. Just slightly stupider and, you know, not an empath.

  • ||

    So Nicole and Sarc are Greek Betazoids?

  • ||

    Can't be. Neither one spends all day worrying about feelings.

  • nicole||

    I believe this is the third major coincidence.

  • ||

    Isn't that the first sign of the apocalypse? THE MAYANS WERE RIGHT!!!

  • ||

    MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

    Notice they don't call this healthcare? I wonder why...

  • ||

    Whatever the reason, it's the Republicans' fault. For your information, Republicans caused Hurricane Sandy, as did they perpetrate the Holocaust.

    True story! I read it in the NYT!

  • ||

    Really? Are the Republicans responsible for the record snow here too? Something to do with CO2 emissions? They certainly loom large.

    (Both Russia and UKR have gotten record snowfalls not seen since the 1880's. Kiev got a metre of snow in two days last week.)

  • ||

    Rus' svyataya -- korolevstvo snezhnoye, zemlya surovikh voin!

  • ||

    Blin! Mne ne nravitsja zemla, chtoby mne holodno! A net devushka dlja mne, kotoryh ja ochen' mne nuzhno zhena!

  • ||

    '...imet' zhena."

  • CE||

    They don't call it "global climate change" for nothing -- they've got all bases covered.

  • Dr. Frankenstein||

    Check here for the Everyday price inflation.

    https://www.aier.org/epi

  • Way Of The Crane||

    Which is precisely why Social Security’s defenders are concerned. They argue that the potential savings constitute a benefit cut.

    This makes sense seeing how everyone in congress considers a reduction in how much future spending will increase to be a spending cut.

  • T||

    Ding. Congresscritters have peddling this line for ages, should I be terribly concerned when it comes back to bite them (and us) in the ass?

  • ||

    Then maybe they should start weening themselves off their addiction to monetary inflation.

  • pmains||

    They argue that the potential savings constitute a benefit cut. That’s not quite right: Instead, benefits would simply grow somewhat more slowly than if we stuck with the current inflation measure.

    We all know, including Social Security's "defenders," that restraining growth is not a "cut" in the normal sense of the word. They are purposefully redefining the word. They and the people they talk to all understand the definition they're using. It's not that it's wrong. It's that they are being purposefully speaking in code so as to mislead the public while being able to later deny that that is what they are doing.

  • LTC(ret) John||

    Chained, unchained - the refrain still needs to ring out ... "no, fuck you, cut spending".

  • A Serious Man||

    Cha-cha-chaaaainnnn, chain of fools.

  • ||

    I was thinking more Van Halen, but whatever.

  • ||

    This is more appropriate for you.

  • ||

    I'm not going to deny it.

  • Ted S.||

    Oh Dear Science. I won that album back in high school from one of those radio station call-ins. I still have the cassette somewhere, but no working tape recorder.

  • Archduke Pantsfan||

    That's the sound of the men working on the chain ga-a-ang
    That's the sound of the men working on the chain gang

  • ||

    I'm disgusted no one has linked to this. Disgraceful.

  • Archduke Pantsfan||

    I almost went with that one.

  • nicole||

    Or this. Except after last week I wasn't expecting anyone to.

  • Adam330||

    Aren't tax brackets and other tax items (individual exemption, etc.) also indexed to CPI? Is the proposal to link those to chained CPI instead as well? That would mean the tax brackets increase more slowly, increasing taxes over time.

  • SIV||

    Yes

  • Lost_In_Translation||

    The government continues to make poor bets on longevity of people with social security so until those bets are fixed, social security will remain a red column.

  • CE||

    Ditch the CPI and the chained CPI (they're just guesses anyway), and use something objective and measurable for cost of living adjustments: the 2-year Treasury Bill rate.

  • ant1sthenes||

    I kind of agree with the anti cpi people here. Alternative goods represent a change in quality, potentially, so you aren't really measuring inflation, you're measuring a combination of inflation and austerity. If you think of benefits as a quality of life rather than a dollar figure, that does make it a benefit cut. Maybe a benefit cut is necessary, of course.

  • waaminn||

    Dude is talking a LOT of smack!

    www.usaAnon.tk

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