Monday, December 24, 2012

How to Quit Worrying and Love the Chained CPI

Do we see George W. Bush or Rush Limbaugh in these pictures?

First, the Difference Between CPI and COLA 
from the "horse's mouth"

In this case the "horse's mouth" is the Social Security Administration.  You can read the whole article here.  It's important to have a good look at the official version before we start in with the "slightly different" versions being bandied about in our Congress.     

  • Old-Age, Survivors, and Disability Insurance (OASDI, Social Security) benefits are indexed for inflation to protect beneficiaries from the loss of purchasing power implied by inflation. In the absence of such indexing, the purchasing power of Social Security benefits would be eroded as rising prices raised the cost of living. Recently, the Consumer Price Index used to calculate the Cost-of-Living-Adjustment (COLA) for OASDI benefits has come under increased scrutiny. Some argue that the current index does not accurately reflect the inflation experienced by seniors and that COLAs should be larger.
  • Others argue that the measure of inflation underlying the COLA has technical limitations that cause it to overestimate changes in the cost of living and that COLAs should be smaller. This article discusses some of the issues involved with indexing Social Security benefits for inflation and examines the ramifications of potential changes to COLA calculation.


OASDI benefits are indexed for inflation to protect beneficiaries from the loss of purchasing power implied by inflation. In the absence of such indexing, the purchasing power of Social Security benefits would be eroded as rising prices raise the cost of living. By statute, cost-of-living adjustments (COLAs) for Social Security benefits are calculated using the Bureau of Labor Statistics (BLS) Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Some argue that this index does not accurately reflect the inflation experienced by the elderly population and should be changed to an elderly-specific price index such as the Experimental Consumer Price Index for Americans 62 Years of Age and Older, often referred to as the Consumer Price Index for the Elderly (CPI-E). 

Others argue that the measure of inflation underlying the COLA is technically biased, causing it to overestimate changes in the cost of living. This argument implies that current COLAs tend to increase, rather than merely maintain, the purchasing power of benefits over time. Potential bias in the CPI as a cost-of-living index arises from a number of sources, including incomplete accounting for the ability of consumers to substitute goods or change purchasing outlets in response to relative price changes. The BLS has constructed a new index called the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) that better accounts for those consumer adjustments.

Price indexes are not true cost-of-living indexes, but approximations of cost-of-living indexes (COLI). The Bureau of Labor Statistics (2006a) explains the difference between the two:

As it pertains to the CPI, the COLI for the current month is based on the answer to the following question: "What is the cost, at this month's market prices, of achieving the standard of living actually attained in the base period?" This cost is a hypothetical expenditure—the lowest expenditure level necessary at this month's prices to achieve the base-period's living standard. . . . Unfortunately, because the cost of achieving a living standard cannot be observed directly, in operational terms, a COLI can only be approximated. Although the CPI cannot be said to equal a cost-of-living index, the concept of the COLI provides the CPI's measurement objective and the standard by which we define any bias in the CPI.

Just a Little More About "Chaining"

The fundamental idea of the COLA was an adaptation to the also fundamental idea that the standard of living in the United States would continually improve.  Without the COLA seniors receiving Social Security benefits would gradually find themselves once again approaching "poverty conditions" in two ways. 

First, because the lower and lower buying power of Social Security benefits without COLA adjustments would gradually move recipients below the "dignity" idea simply because the rest of the country, comparatively, prospered more and more.  If this were to occur, those currently contributing pay roll taxes to Social Security would be less and less convinced that it was a good deal.

Second, the country had accepted the more or less inevitable currency inflation.  With prices inflating, again, Social Security benefits which couldn't "keep up" would look less and less attractive to those currently paying into the system.

The very first part of this discussion about "chaining" is important.  As long as the over all standard of living continued to improve, COLA, in a sense, already amounted to "chaining."  The reason we might not at first think so is because  previously standards of living were always increasing.  Now, however, we find standards of living decreasing.

If we were willing to accept the idea [and the public relations damage] of negative COLA's based on the continuing contraction of the economy, the "chaining" idea would simply become superfluous.  In this modern case that idea is introduced to revive the capacity to decrease Social Security benefits as the over all standard of living decreases.

Automatic Cost-Of-Living Adjustments
July 1975 -- 8.0%
July 1976 -- 6.4%
July 1977 -- 5.9%
July 1978 -- 6.5%
July 1979 -- 9.9%
July 1980 -- 14.3%
July 1981 -- 11.2%
July 1982 -- 7.4%
January 1984 -- 3.5%
January 1985 -- 3.5%
January 1986 -- 3.1%
January 1987 -- 1.3%
January 1988 -- 4.2%
January 1989 -- 4.0%
January 1990 -- 4.7%
January 1991 -- 5.4%
January 1992 -- 3.7%
January 1993 -- 3.0%
January 1994 -- 2.6%
January 1995 -- 2.8%
January 1996 -- 2.6%
January 1997 -- 2.9%
January 1998 -- 2.1%
January 1999 -- 1.3%
January 2000 -- 2.5%
January 2001 -- 3.5%
January 2002 -- 2.6%
January 2003 -- 1.4%
January 2004 -- 2.1%
January 2005 -- 2.7%
January 2006 -- 4.1%
January 2007 -- 3.3%
January 2008 -- 2.3%
January 2009 -- 5.8%
January 2010 -- 0.0%
January 2011 -- 0.0%
January 2012 -- 3.6%
January 2013 -- 1.7%

The above list of COLA calculations from 1975 to the present illustrates this idea of never having a "negative COLA."  After remaining below around 4% increases through the Bush autocracy, COLA suddenly increased to almost 6% in 2009 when the economy was attempting to stagger back to its feet.  With the 2009 COLA, Social Security benefit recipients found themselves "doing better" than other Americans who still had jobs and pay checks.  Additionally, the high COLA in 2009 was stimulus -- it pumped cash and liquidity back into the wreckage remaining after the Bush era looting. [COLA table source: ]

Next, when we look at COLA for 2010 and 2011, we see that Social Security benefits were showing a stability which was absent in much of the rest of the economy.  Had there been a cost of living adjustment in these two years  -- 2010 and 2011 -- it would have been negative.  Predictably, many younger Americans who should have, according to our traditional pattern, been starting jobs and careers were returning home to older parents whose Social Security benefits were higher than what they could have earned.

The more enduring aspect of this side of the economy's collapse centers on this exact point.  Younger workers in more stable times began to accumulate wealth when they reached this age, but during the Great Republican Recession of 2008, many of those young Americans were deeply in debt and without much of a prospect for any kind of decent job.

The toxic Bush "regulation-free episode" not only wrecked the EU and also deeply wounded Asia and Arabian wealth as well, but here in the US there were no new cars or even relatively nice used ones for the 20-somethings.  Even the normal rate of marriages tapered away after facing the prospect of making love with one's new wife in the same bed where one had first enjoyed the hushed sex of his teen age years.

The 20-somethings were still interested in sex, of course, but in the post-Bush economy they had also become much more interested a warm place to live,  in food and in the angry banksters on the line calling about their student loan defaults.  Only the most fool hardy had ambitions which included buying a house.

The mighty engine which was the American consumer economy had suddenly found itself under attack during the autocracy of the unelected President.  The American middle class found itself without Congressional defense, and it took some incredibly serious hits.  We are presently "absorbing" the massive looting and the economic damage it caused.

As a note:  The primary reason that our democratic institutions are currently in such a precarious, dangerous state is precisely because too many American voters have still never accepted the gravity of the horrendous economic damage which was done during the Bush years.  When we consider economic matters such as the topic of this posting, we need to remember to require a little durable optimism.  Things here may, actually, have gotten about as bad as they are going to get for the foreseeable future.

When the tea bags in the House of Representatives keep demanding "entitlement cuts," they are referring to out right reductions in Social Security benefits.  They want these changes so the repayment of the incredible debt they incurred against the Social Security Trust during of the immense borrowing of, again, the Bush Administration can be delayed until they are out of office.

Thankfully, voter opinion is beginning to turn on this issue, too. Until now the tea bags have been given a "more or less fact free ride" by the commercial media -- which has steadfastly reported just enough of the tale to assuage the low information voter among the GOP base. However, the Republicans, especially given the election disaster they have just endured, suspect that the hypnotic veil is lifting.

Decreasing Social Security benefits has long been a "dog whistle" to the low income Republican base convinced that it is supporting its dead beat neighbors.  This deception has now, quite clearly, begun to crumble in its foundation.

The full thrall of the spell is not entirely broken, but it is breaking.

Austerity and the Basic Idea Behind the COLA

Of course not everyone in the US lives under the same conditions.  The differences in various standards of living are practically one of the "axioms" which justify the "free enterprise" system.

Because of this, no one expected the folks who live primarily on income from their Social Security benefits to necessarily be inhabiting the top percentile of the standard of living. Quite the opposite, Social Security was designed to provide a lower level "backstop" with respect to how poor Social Security recipients would be.  The program was, famously, designed to provide dignity during one's later years, and in this case, "dignity" meant a better standard of living than abject poverty.

Elderly poverty was rampant after the First Great Republican Depression in the 1930's, and Social Security was devised as a means to mitigate that horrible poverty.  When Social Security became law, the lives of seniors improved enough that the life expectancy began to climb.  With respect to everybody, poverty kills.  With respect to older Americans, poverty really kills.

The material [above] from the Social Security Administration explains at least the prevailing supposition of how the COLA - Cost of Living Adjustment - was intended to work.  It should also provide a fairly persuasive suggestion that the calculation of things such as the COLA and the CPI are quite empirical.

In other words there are "legislated rules" which direct the calculation of such things.  If this were not the case, whoever controlled the Congress would be able to simply set the COLA and the CPI where ever convenient.

Let's just say that this brief discussion has "broken the ice" just a bit.  In no time we find ourselves facing some truly perplexing questions. 

We have all heard the repeated litany of conceptually divorcing Social Security from the debt and deficit discussions.  Over and over, Ronald Reagan's historic explanation that "Social Security has nothing to do with the budget deficit." has been proffered up by all sorts of players, remarkably, almost exclusively Democrats.

Yet, here we are again.  The House tea bags, still tragically blinded by their ideological hatred of Social Security, have demanded cuts to "entitlement spending" as the required ante for their cooperation in matters such as raising the debt ceiling, increasing tax revenues and overall "shrinkage in government spending."

This behavior of passionately and desperately attacking the wrong problem is a common trait of addicts and alcoholics -- even when they are behaving more or less honestly.  With the House tea bags, the same trait is strikingly and unilaterally "self-defining" even when they are not acting honestly, which now is most of the time.

Social Security as an Economic Factor

The statement that Social Security has nothing to do with causing the budget deficit is true.  Politicians from Ronald Reagan to Bernie Sanders have unequivocally said exactly this -- even when they knew we were listening.  However, the Social Security program does, actually, have a good deal to do with how the economy is  functioning.

During times of grave recession, monthly Social Security benefit checks act as a "buffering stimulus."  Although the same checks were also being cashed during better economic times, during a recession they represent a direct infusion of literally billions of dollars worth of cash into the nation's economy every month.

When the economic problem is, unmistakably, a demand side problem, more cash in the pockets of Americans creates demand immediately.  Further, those receiving Social Security benefits, by and large, spend those benefits basically as quickly as they get them.

Republicans have always obsessed over the huge pile of money in the Social Security Trust.  In fact, this obsession prompted Ronald Reagan to make his famous statement about Social Security playing no part in the budget deficit.  Reagan went ahead to strike a bipartisan deal to double the revenue to the Social Security Trust to accommodate the increased demands of the population bubble we call the "baby boomers."

The constant refrain from the Republican "economy experts" is that the size of  the Social Security Trust is the "problem."  Their perennial solution has remained unchanged for decades.  The Trust Fund must be removed from the control of the Social Security Administration and placed in a Wall Street "casino" investments where it will accrue funds more rapidly.

Although the program which issues the benefit checks is entirely solvent for decades, it does present a pressing economic problem for Republicans right now.  They really are now the official owners of the huge debt from the money they borrowed from the Trust.  Although the form of the loans was in a sort of "special Treasury note," debts must still be repaid sooner or later.

As a political Party clearly bereft of any particular plan for economic policy and  governance, all that currently occurs to the Republicans is to reduce the monthly benefit payments sufficiently to relieve the growing pressure to repay the money they borrowed during the Bush years.  A straightforward legislative solution to simply solve the fiscal problem would involve raising taxes and, hence, would be unthinkable for them.

There may be also something to say about the economic impact of raising the "ceiling" of income which carries the Social Security tax from its current [2013] base of $113,700.  The obvious solution -- if one is even required -- is to simply raise this ceiling so more income is taxed.

If this ceiling were raised, the increased Social Security revenue would be extracted from, in this case, income over $113,000.  The question for the economic impact of such a change is whether or not a Social Security tax dollar withheld just above the $113,000 mark diminishes economic demand as much as a Social Security tax dollar withheld from, say, a $40,000 income would.

MeanMesa is convinced that the burden should be shared even more than it is now.  The ceiling for paying the Social Security tax, if we want to roughly compare it to the period in the COLA chart above, has increased from $14,100 in 1975 to the current $113,700 in 2013.

Contribution and benefit bases, 1937-2013
Year Amount
1937-50 $3,000
1951-54 3,600
1955-58 4,200
1959-65 4,800
1966-67 6,600
1968-71 7,800
1972 9,000
1973 10,800
1974 13,200
1975 14,100
1976 15,300
1977 16,500
1978 17,700
1979 22,900
1980 25,900
1981 29,700
1982 32,400
1983 35,700
1984 37,800
1985 39,600
Year Amount
1986 $42,000
1987 43,800
1988 45,000
1989 48,000
1990 51,300
1991 53,400
1992 55,500
1993 57,600
1994 60,600
1995 61,200
1996 62,700
1997 65,400
1998 68,400
1999 72,600
2000 76,200
2001 80,400
2002 84,900
2003 87,000
2004 87,900
2005 90,000
Year Amount
2006 $94,200
2007 97,500
2008 102,000
2009 106,800
2010 106,800
2011 106,800
2012 110,100
2013 113,700

Payroll deductions for Social Security do, in fact, remove "demand creating" money from the economy, but the benefit payments actually, in fact, increase demand because they are almost entirely spent by benefit recipients.  When just about all the "demand creating" processes in the economy had faltered in 2008, Social Security benefits were still pumping money into the economy, yes, stimulating it. [Read the entire article: ]

Also importantly, the money being "pumped into the economy" was "paid for money," not inflationary stimulus rolling off the printing presses in Washington, D.C.

Obama the Social Security Chess Player

The President, for the second time in the last 24 months and in another notable episode of apparent "self-contradiction,"  has once again placed Social Security "on the table" while dealing with House Republicans.  In both instances Republican "extortionists," unable to coherently formulate any kind of economic policy to solve the disaster they created in 2008, are again threatening to eliminate unemployment insurance, Pell Grants and a number of other programs during "negotiations" about deficits and debt.

Violence against any of these "targets" they are now threatening would further aggravate the already horrible "demand side" crisis. 

So, how does the President entice these profoundly unstable ideologues to the bargaining table?

Don't freak out.  Our guy is playing chess.

The only thing that will get creatures such as Ryan, Boehner or Cantor to even answer the Congressional phone is a ghostly insinuation of caving in to the Republican base's favorite "red meat" and "dog whistle" wet dream: cutting entitlements.

Cutting Social Security benefits.

By the way, the "Ryan-Cantoresee" tea bag Mafia version of "cutting Social Security benefits" includes continuing to collect Social Security taxes from poor and middle class Americans at the same rate as now after benefits are reduced.  The "Ryan-Cantoresee" plan would further injure the economy and, according the CBO, also further increase the national debt.

The President had to hint that he might be willing to "cut entitlements" to get the Republicans to pass the debt ceiling increase -- rather than default -- in 2011.  Now, the bullies in the GOP House "boys only" club have doubled their threat.  If the President doesn't cave in on "entitlement cuts" this time, two hostages will be castrated then decapitated by the GOP -- first the fiscal cliff, then following that up, another wildly crazy refusal to increase the debt ceiling.

See, as Americans, we own the cliff.  Going over the cliff would be an entirely self-imposed injury.  The GOP doesn't own the cliff.  The GOP may have built the cliff during the autocracy, but they gave it to us as quickly as they could once they were through looting. This hand off is sort of like the young, proud, new father instantly placing his "bundle of joy" into the hands of his wife when his son poops.

All the things that Republicans are anxious to do to "save the economy" have to be considered in light of the fact that these are the same Republicans who wrecked the economy!  And, not just the same Party, either.




MeanMesa is not worried about the COLA chaining, entitlement cuts or even the fiscal cliff.  Barack Obama has our back. Trust him.

MeanMesa's compliments to the President.

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