iPods for the Elderly

|

Matt Yglesias revisits an argument he made a few months back in his Prospect column against proposals to shift from wage-indexing to price-indexing when calculating Social Security benefits:

[The] relevance of iPods to the Social Security debate is that this is the rationale for wage indexing rather than price indexing. As general living standards improve, so do one's reasonable expectations of what constitutes a dignified retirement. Today, we have iPods. By the time I retire, there'll be all sorts of new cool shit out there. I shouldn't be stuck, à la price indexing, with 2005 living standards when I'm retired in 2055.

Now, in the column, he makes the additional argument that we should stick with wage-indexing because "that's what the law says" and so we've made an implicit promise to provide those higher payouts. I'm not sure I'd buy that logic in any event, but it takes an extra hit when you recall that wage-indexing was introduced in the late 70s, during an aberrant period when prices were rising faster than wages. In other words, the (myopic) notion was that wage-indexing would save money by resulting in lower benefits. In any event, the fact that the compensation formula changed that recently, combined with the ruling in Flemming v. Nestor, make the notion that there's some kind of implicit guarantee of a specific payout level a hard sell.

That aside, though, there's a problem with Matt's argument that tying benefits to inflation will leave retirees in a kind of time capsule, stuck driving Model-Ts and cranking the Victrola while the rest of us pop music crystals into our flying cars. Now, having an iPod made Rep. John Doolittle (R-Calif.) rethink restrictive copyright laws, so I'm all for cool gadgets for old people. But here's what Matt's missing: As Virginia Postrel has noticed, qualitative improvements aren't typically adjusted for in the Consumer Price Index when measuring inflation. In other words, if a 2005 model car costs more than a 1980 model of the same make, that increase is used to figure inflation. An inflation-based benefit boost, therefore, will already capture the fact that the 2005 model car has all sorts of features—CD-player, power windows, maybe GPS—that wouldn't be standard in 1980. So it's wrong to suggest (as Matt does) that under price-indexing, retirees would be "stuck at the much lower standard of living enjoyed in their youth." Now, since wages do grow faster than prices, a price-indexed Social Security wouldn't raise living standards as much as the current method. But Matt's own arguments about massive technological progress actually undercut the point he's trying to make: Even if they don't enjoy as high a relative standard of living, retirees in 2050 will still almost certainly be considerably better off than their younger-selves today.

NEXT: Sherlock Shaabullah

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. And besides, if you’re depending only Social Security, you won’t be buying much of anything anyways.

  2. What’s with all this benefits=promise crap anyway? Can I get an implicit promise that I won’t have to pay a higher percentage into the system? And since when did anyone believe a politician’s promise?

  3. Wages are prices.

  4. Now, having an iPod made Rep. John Doolittle (R-Calif.) rethink restrictive copyright laws

    I thought republicans weren’t allowed to have Ipods, on the theory that it’s just as easy to forget about God dancing with your Ipod on as it is to foget about God during a Nazi rally? Guess somebody forgot to read their talking points faxes again!

  5. Murphy’s Law says that if we do adopt price indexing the American economy will suddenly shift into a perverse state where prices rise faster than wages.

    Not saying that I’m against the idea, just that I’m a pessimist today. That’s what happens when you do theoretical physics late the night before.

  6. I shouldn’t be stuck, ? la price indexing, with 2005 living standards when I’m retired in 2055.

    Then start saving and investing, you little tool.

  7. Todd, for those people who are entirely dependent on Social Security for their livings after retirement, there is a huge difference between “buying much of anything” and “buying nothing.”

  8. “Wages are prices.”

    Speaking of which, Castro announced that he is going to double the minimum wage in Cuba. If only the U.S. government displayed that kind of economic brilliance, we’d all be living large!

  9. dead_elvis,

    Don’t worry. They’re working on it.

  10. Speaking of which, Castro announced that he is going to double the minimum wage in Cuba.

    That means he’ll crush the capitalists for sure…

  11. Matt and especially his commenters are all ate up with that protected definite benefit argument. I had a 4-5 post exchange with a guy who insisted that government promises as contained in the social security should be held to the same level of protection as your existing property under the 4th amendment!

    I think it is one of the ways they try to refute the ’empty promise’ feeling that most young workers have about Social Security. When I suggested, as phocion did, that if the government raises taxes on me, how can they not be violating the promise to me? Isn’t any counterargument purely semantic? Raise my taxes by $10,000, but protect the promise of my $1,000 “benefit”. Uhh, hooray?

  12. “I had a 4-5 post exchange with a guy who insisted that government promises as contained in the social security should be held to the same level of protection as your existing property under the 4th amendment!”

    huh. that’s…huh.

    well, at least he cares about social security. i had to explain the basics of how it works to a room full of 20 and 30 somethings recently. oddly enough, none of them believe it will exist when it comes time for them to retire.

  13. Perhaps consumer electronics like the I-Pod are’t the best example to use when predicting that price indexing won’t be a big deal. When I started my working life I remember paying well over a hundred 1975 dollars for a calculator that would add, subtract, multiply, and divide. Last week I got a much better one free with my new checkbook cover.

    That would play hob with price indexing.

  14. is it actually the case that wages have been rising faster than prices in the US in the past few years? I had the impression that there was mild price inflation and stagnating wages since the turned the corner of the recent recession.

  15. There is some sense to the notion of adjusting for quality in price-indexing, but there’s also the problem of availability. You can’t buy a midsize sedan nowadays that has the same features as a standard midsize of 1980. Yes, the midsize sedan you buy today is better in most ways, but the rise in cost is real; if you want a midsize sedan, you HAVE to pay for all the ancillary improvements. You don’t have the choice of buying the stripped-down car of 1980.

  16. Prices aren’t inflated. Wages (prices for labor) aren’t inflated. The money supply is inflated, and nominal rises in the wage level and/or the price level are merely artifacts of that inflation. OK, that ignores secular increases and decreases in the price of any particular good or service, and any knock-on effects. The media-idiots are babbling on currently about how “increased oil prices are contributing to inflation”, which is nonsense. Higher fuel prices are driving up costs in all sectors, and those that have some pricing power are raising prices, while those without it are not (or not so much).

    Any professional econo-wonks ever consider indexing gubmint bennies negatively to inflation? That’d build a voting block for sound money, I’m thinking. 🙂

    Kevin

  17. Julian slightly misstates what I wrote and therefore misrepresents Bureau of Labor Statistics procedures. It is not the case that “if a 2005 model car costs more than a 1980 model of the same make, that increase is used to figure inflation.” When a new model contains easily identifiable new attributes, such as antilock brakes or a rear window defogger, it is considered a “new product.” The old model is removed from the price index, and the new one is put in its place. The price increase is not simply considered inflation. (The question of how much of the price increase on new car models is attributable to their new features and other qualitative improvements and how much is simply a price hike timed to coincide with the model year is, in face, the subject of much debate.) The overstatement of inflation occurs when qualitative improvements are not easily identified and measured, e.g., nicer hotel room design or even a better bed or, in the car example, improved painting technology. In these cases, the improved version is not considered a “new product” but, rather, a more expensive version of the existing product, with any price increase going into the aggregate that tracks inflation. Inflation is, as Kevin notes, a monetary phenomenon, but it’s virtually impossible to measure directly.

Please to post comments

Comments are closed.