AARP is Wrong About Inflation

I’m getting a 3.6 percent increase in my Social Security retirement benefits on January 1. This reflects the rise in the “cost of living.” I’m happy for the money, but it’s wrong: every economist who has studied the issue knows that the Consumer Price Index (CPI-U) used for this adjustment overstates inflation by failing to account for the fact that people substitute away from goods and services whose prices rise relatively rapidly.

For a decade the U.S. Bureau of Labor Statistics has published a measure that accounts for this substitution, the chained CPI (C-CPI-U). Over the last 10 years it has risen 24.4 percent, while the CPI-U has risen 27.4 percent (and 3.7 instead of 3.9 percent this past 12 months). The C-CPI-U is a better measure of the cost-of-living, and it should be used (although even it overstates inflation because it doesn’t account fully for improvement of products).

Unsurprisingly, groups claiming to represent us greedy geezers are vehemently against even this change, “This so-called ‘chained CPI,’ through compounding, would cut seniors’ benefits by thousands of dollars over their lifetimes ….,” said AARP Executive Vice President Nancy LeaMond.

Of course, nobody’s benefits would be cut. Rather, their future benefits would rise less rapidly and would reflect better the prices of the goods they consume. My advice to other geezers: suck it up—this is the right thing for society and the right thing logically.

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  1. Philippe says:

    I thought there was no COLA change last year though, so what are the numbers since the last increase?

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  2. DanSanto says:

    Hidden due to low comment rating. Click here to see.

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  3. Blaise Pascal says:

    So let’s see if I understand this…

    Assume Ben & Jerry’s ice-cream costs $3/pint in 2000, and that I regularly buy it. In 2010, it cost $4.44/pint (4% annual inflation), and I decide that’s too expensive, so I substitute store-brand premium ice cream ($2.50/pint in 2000, $3.70/pint in 2010, still 4% annual inflation).

    Under CPI-U, this would be treated as 4% annual inflation, but under C-CPI, it would be 2.1% annual inflation?

    If so, then the lower inflation figure is accompanied by a decrease in my standard of living, as the quality of the goods I buy decreases with my decreased ability to pay for the goods I would prefer.

    I can see why reasonable people would argue against using chained CPI as a true measure of inflation.

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    • Sam says:

      It doesn’t work that way at all. The index is designed to only substitute items that have the same consumer satisfaction.

      If you are equally happy with a Big Mac or the Chicken McNuggets and the Big Mac goes up in price by 20%, but the nuggets go up by 5% you will switch to buying the nuggets more often, but experience no less consumer satisfaction.

      If Plasma TVs go up by 30% are you really that worse off being the LCD TV that only went up 5%? For the most part no.

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    • Enter your name... says:

      Is the store-brand premium ice cream really “lower quality” than the name-brand ice cream?

      I’m not overly impressed by labels myself, and while I haven’t attempted the specific comparison you suggest here, I have generally found (with a few exceptions) that the name-brand product is no better than the store brand. In fact, in a number of cases, especially at Trader Joe’s, I’ve found that the products are not only apparently identical, but also produced by the same manufacturer in the same facilities.

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      • Mike says:

        Let it melt and see which actually has more content to it. Or weigh them each. Premium ice cream is more expensive, but it’s a lot heavier because it doesn’t have as much air whipped in.

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      • Enter your name... says:

        The original poster specified that both the name-brand and the store-brand ice creams were “premium”. It’s not a question of premium vs regular ice cream. It’s a question of how much value the brand name adds to his enjoyment of the ice cream.

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  4. Jimbo says:

    It is sneaky and inaccurate, but perhaps they are trying to reduce their payout increases because they know Social Security is fated to go bankrupt in the not-so-distant future anyway? Or perhaps I need to apply Heinlein’s Razor more vigorously. I mean, if there is any one thing that is consistent throughout history, it has been that governments as a rule do not behave intelligently.

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  5. foosion says:

    >>the Consumer Price Index (CPI-U) used for this adjustment overstates inflation by failing to account for the fact that people substitute away from goods and services whose prices rise relatively rapidly.>>

    If people buy dog food instead of hamburger because hamburger’s price rises relatively rapidly, I would hope we would all agree their standard of living has declined. I would say the cost of maintaining their standard of living has gone up and therefore inflation has gone up. You would apparently say inflation is overstated.

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    • Joshua Northey says:

      On the other hand if people buy Ipod Nano’s in 2010 for $99 instead of Sony Discman’s in 2000 for $59 what has happened to their standard of living?

      Seniors are always crying about their “fixed incomes”, but almost everyone’s income is “fixed”. Last year the COLA increase in my metro was 3.9%, I only got a 3% adjustment, but I would bet anything my dollars will go farther and buy a better set of goods this year than last.

      On top of that people are healthier and can work longer. I have two grandparents over 80 years old who work full time, their incomes are no more fixed than mine. Both of them have money, pensions, and could be retired, but they are hardworking people and would rather be working than laying around watching Fox News and soap operas. And before you say “health doesn’t let that be an option for everyone”, the health situation in both cases is terrible. Between them I think they have had 6 joints replaced in the last decade, a bad heart, failing vision, trouble with stairs, and a couple broken bones from falls. Yet they still manage to work (granted not in their original fields). Did they have to take a substantial pay-cut? Yes. But they still make quite a bit more than they would otherwise.

      Right now my city is proposing a property tax increase moratorium for people over 65 so “seniors aren’t forced out of their homes”. The campaign’s poster child is some 90 year old woman who only makes $1,100/month and says her $5,000/year property taxes are going to drive her out of her house.

      Well the taxes absolutely should. It is a 2500 sqft house with 4 bedrooms, in the heart of a major city with major city services and you have one old lady living there? People need to learn that life isn’t all fairy tales and lollipops, and if you wanted to stay in your house until you died you should have prepared for retirement better. Someone has to pay for those services!

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  6. Mike says:

    Can we stop all the “fixed income” talk and start referring to Social Security as “guaranteed income”? And one that gets raises!

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    • juley says:

      Yeah, guaranteed poverty-level income, don’t I feel special? Cost of Living increases are not “raises.” They are a feeble attempt to keep up with inflation, and they fail miderably.

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  7. jonathan says:

    The policy argument is really not covered in the post: it assumes substitution is fine. Is that true? Substitution may be to lesser quality of the same good. If it’s food, it may be to less nutritional versions. It may also mean shifting spending away from goods that are either desired or needed. Why should an elderly person be denied choice? Why should the choice of cpi mean lower quality of life? While substitution is in the aggregate a shift that preserves overall needs, it doesn’t speak to individual needs. Should those people then be punished?

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    • Sam says:

      Yes, it does assume substitution of items that give equivalent satisfaction is fine. What issue do you have with that?

      It does NOT ask anyone to replace steak with dog food, even if it has the same nutritional value. It also does not ignore the price of gasoline increasing because people can just walk instead or any other hyperbolic scenarios you might conceive.

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    • Enter your name... says:

      If it’s food, the substitution may be to *more* nutritional options. Cash-strapped seniors might choose chicken over fatty steaks, healthy beans over salty, greasy potato chips, and filling squash rather than store-bought cookies.

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      • James says:

        A definite second to that one! I enoy cooking, buy a lot of my ingredients from the bulk bins at my local market, and probably spend a fraction of what the typical person does on food. Plus I get variety, and overall a healthier diet – though that’s not my primary goal.

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    • Enter your name... says:

      Also, the kind of substitution they’re talking about isn’t really the “bargain shopping” sort, in which you find a cheaper way to get the same thing: it’s deciding that since ice cream has gotten expensive (as it does periodically, whenever there’s a drought or a spike in fuel costs), you’d rather have apple pie, or cookies, or chocolate cake, or whatever other dessert has stayed about the same price and which you think is exactly as good a dessert as ice cream.

      And if you’re really hung up on the “necessity” of brand-name premium ice cream for dessert, then you make those substitutions in other areas: rice rather than spaghetti, for example.

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  8. Maneki Nekko says:

    So why adjust for inflation at all? As prices rise, seniors will simply make substitions — first steak, then hamburger, then turkey burger, then cat food.

    In fact, why not roll back Social Security benefits to the 1940 level? If people could live on $22.54 then, they should be able to do so now. They just need to make the right substitutions.

    In your own words: Suck it up, geezers!

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    • Tim says:

      Straw man arguments are fun!

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    • Joshua Northey says:

      Society cannot be responsible for making sure everyone has Hagendaz instead of Kemps…

      It is always easy to whine about justice and fairness and “wouldn’t it be nice” when you are not the one paying for it.

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      • juley says:

        Actually, Social Security recipients HAVE payed for it, which is why they are eligible to collect it. They have payed into a system that is similar to insurance, except that there is supposed to be a guaranteed payout which may or may not amount to what was payed into the system during their working years.

        You can argue that the system is not well balanced, needs reorganiztion, etc., but it is foolish to complain about paying for it because you are supposedly going to be a recipient as well. That is the premise anyhow.

        I find people like you to be much whinier than the seniors!

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    • James says:

      Somehow I get the impression that you’ve never owned a cat, or at least never bought canned cat food for it. It’s really not the cheapest alternative.

      I suspect that the “poor old people can only afford cat food” thing is just another urban myth. If old people do in fact turn to cat food, a more plausible explanation is that age-related deterioration in the sense of taste makes cat food the only thing they can really taste.

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    • Peter says:

      Meanwhile, people who are 30 or 40 now will enter the SS receiving age when the trust fund is completely out of reserves and only taking in 75% of what is needed immediatly. Sometime between now and then, SS is going to have to have a serious decrease in payout.

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