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.


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



I'm sorry if I'm less than impressed here, but the arguments over which index is the best representation have gone on for decades and will continue for decades more (possibly centuries). The difference between 27.4% and 24.4% over the course of a decade is not enough to get me worried.

On the scale of the problems social security is facing right now, raising benefits by an extra .3 percentage points each year gets lost in the rounding errors.

And what annoys me is that I've recently been hearing a series of radio commercials by the organization to preserve social security (or some name like that) which call for ZERO cuts to social security benefits.

Frickin' morons!

Blaise Pascal

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.


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.


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.


>>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.

Joshua Northey

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!



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


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?


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.

Maneki Nekko

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!


Straw man arguments are fun!

caleb b


I think we should tax any Social Security benefits you receive at 100%. You don't need it AND you're just going to save it anyway. You're making over 100k/yr and have a pention guaranteed. I think it's time that you started paying your fair share. Do the right thing for society!

"if you want to balance budgets surely taxes should be raised on those with high propensities to save (arguably the well-to-do) and reduced on the rest of society, so as to stimulate consumer demand. " - Daniel Hamermesh


Exactly, those greedy seniors don't need to eat steak, they can just eat hamburgers. Oh, and that nice safe Chevy Impala they're driving.. screw them, make them buy an Aveo...