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Home Publications Blogs Beat the Press Brooks Jackson Uses Annenberg FactCheck to Push for Cuts to Social Security

Brooks Jackson Uses Annenberg FactCheck to Push for Cuts to Social Security

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Wednesday, 12 December 2012 05:34

The Very Serious People have taken off the gloves. There are no rules when it comes to the battle over Social Security and Medicare as Brooks Jackson shows in his "FactCheck" on the use of the chained CPI to index the Social Security cost-of-living adjustments (COLA).

Jackson strongly endorses the use of the chained CPI, describing it in the first sentence as "a more accurate cost-of-living adjustment." The chained CPI would have the effect of reducing the annual COLA by approximately 0.3 percentage points. This reduction would be cumulative (e.g. 3 percent after 10 years, 6 percent after 20 years), leading to an average cut in lifetime benefits of approximately 3 percent for the typical beneficiary.

To push his case, Jackson seriously misrepresents the evidence. There is reason to believe that a chained index provides a better measure of inflation, since it takes account of the substitution between goods. However, the Bureau of Labor Statistics (BLS) has been producing an experimental elderly index (CPI-E) for almost three decades, which has generally shown a somewhat more rapid rate of inflation than the standard CPI currently being used to index Social Security benefits. The CPI-E would imply that the current COLA has been underadjusting for inflation, not overadjusting. 

Jackson notes the CPI-E, but dismisses it as:

"an unpublished, 'experimental' index"

He then cites BLS's warning that:

"'any conclusions drawn from it should be used with caution.' BLS also concedes that the CPI-E has a number of shortcomings because it simply re-weights the price data collected for its regular price surveys, without attempting to collect some important data specific to seniors."

Given that this experimental index has shown evidence that the elderly see a higher rate of inflation than the population as a whole, it would seem that anyone concerned about having an accurate measure of the rate of inflation experienced by the elderly would want to see the BLS construct a full CPI-E. In fact, several hundred economists recently signed a statement calling on BLS to construct such an index. This would be the obvious route to go for anyone interested in an accurate index for the inflation adjustment of more than $10 trillion in Social Security benefits over the next decade. 

 

In addition to belaboring the obvious, that the CPI-E is an experimental index, Jackson also misleadingly presents evidence. He tells readers;

"Another shortcoming [of the CPI-E] that BLS readily admits is that the “elderly” index takes no account of “senior discounts” available on such purchases as movie tickets, car rentals, train tickets, public transportation, chain restaurants and so forth."

While Jackson presumably wants readers to believe that this omission means the CPI-E would overstate the rate of inflation seen by the elderly, that implication does not follow. It is true that the elderly are eligible for certain discounts, which means that they would face lower costs on the discounted items than other consumers. However, the CPI is not measuring levels of prices, it is measuring changes in prices.

This means that the relevant factor for purposes of calculating the rate of inflation seen by the elderly is whether senior discounts are getting larger or smaller through time. The fact that such discounts exist tells us zero about the rate of inflation seen by the elderly.

Jackson also notes that the recent slowing of health care costs has caused the gap in the rate of inflation shown by the CPI-E and the standard CPI to disappear in the last few years. [The weight of health care in the CPI-E is close to twice as large as its weight in the standard CPI. More rapid growth in health care costs is the main reason that the CPI-E has shown a higher rate of inflation than the standard CPI.] While this is true, Jackson failed to draw out the logical implication of this comment.

If the slowdown in health care costs continues, then the official projections of spending on Medicare, Medicaid, and other health care programs are hugely overstated. These projections assume that health care costs will increase far more rapidly than the overall rate of inflation. This means that either projections for government spending on these programs are overstated, and therefore projected deficits are overstated, or alternatively the closing of the gap in the inflation rates shown by the CPI-E and the overall CPI is temporary. 

In other words, if the projections of large future budget deficits are accurate, then the CPI-E will show a higher rate of inflation than the overall CPI. This is not the only situation where Jackson fails to acknowledge the implications of his own claims. He also cites the Boskin Commission report that claimed that the official CPI overstates the true rate of inflation by 1.1 percentage point annually. (A 2000 survey of surviving commission members by the Government Accountability Office put the annual overstatement at 0.8 percentage points, after the BLS had made a number of changes in the CPI.) 

If this overstatement is true, it means that living standards are rising much more rapidly than our data show and that official projections imply. For example, instead of average real wage growth being 1.1 percent annually, if the Boskin Commission is correct, average annual real wage growth has been almost 2.0 percent. This implies that young people will be far wealthier than we imagined. In 2042, the average real wage will be close to 80 percent higher than it is today.

This should hugely impact how we view intergenerational equity issues, since the Boskin Commission's claim on the overstatement of inflation also implies that older people were much poorer growing up than our data show. (If wages and income have been growing more rapidly than our data show, than the levels in the past would be lower than our current data indicate.) It would be rather perverse to use evidence showing that the elderly were poorer than we believed and the young will be richer as a rationale for cutting benefits for the elderly, ostensibly to improve the plight of the young.

The concluding statements in this "factcheck" are simply illogical. It tells readers:

"We take no position here as to whether benefits for seniors are too high or too low, whether future cost-of-living adjustments should be higher or lower, or how income-tax brackets should be adjusted in the future. ....

"But it’s just a fact that leading economists have said for many years that the current CPI overstates the true rate of inflation. So using it to index federal programs produces more spending and less revenue than a more accurate measure would justify."

The assertion in the last sentence that using the current CPI to adjust benefits, "produces more spending and less revenue than a more accurate measure would justify" is clearly taking a position on "whether future cost-of-living adjustments should be higher or lower."

Again, there is a simple answer for those who want a cost-of-living adjustment that accurately measures the rate of inflation for the elderly: have BLS construct a full elderly index. Brooks Jackson instead used FactCheck to argue for a reduction in Social Security benefits.

Comments (21)Add Comment
Leech
written by David, December 12, 2012 7:51
Apply more leeches, says the leech. It's amazing that Jackson draws a salary for this.
...
written by skeptonomist, December 12, 2012 8:04
A good inflation index for seniors would be very useful, but there is no reason that SS benefits have to be tied to such an index for decades in advance. Since SS is basically a pay-as-you go program that annually transfers money from workers to retirees and disabled, the rates of benefits and taxation can be settled any time. Once the baby-boom bulge is out of the way, there is no economic reason why (for example) there could not be a referendum in national-election years giving voters a choice of rates. The effects of inflation could be evaluated annually.

SS bashers have managed to confound the problem of balancing the level of benefits with payout of the Trust Fund with survival of the whole program. If the benefit and taxation levels are not quite right to solve this fairly minor problem, there is no reason why they could not be addressed in the future whenever necessary. The viability of the program does not really depend at all on having a positive balance in the Trust Fund - that legal requirement could be removed at any time by Congress. It is just some writing on paper that could easily be erased or superseded.
...
written by liberal, December 12, 2012 8:45
skeptonomist wrote,
A good inflation index for seniors would be very useful, but there is no reason that SS benefits have to be tied to such an index for decades in advance.


Agree. There's no principle of fairness that alone says we "have" to index payouts to inflation. It might be good idea for a variety of reasons, but it might not be.
...
written by liberal, December 12, 2012 8:49
David wrote,
It's amazing that Jackson draws a salary for this.


Au contraire, it's to be expected. People respond to financial incentives. Clearly the incentive of elite/top level journalists, as well as economists themselves, is to whore themselves out to the rich and powerful.

And no, I'm not being facetious. Dean, for example, is a very bright guy. I don't know for sure what he makes, but I think it's safe to say it's chump change compared to what he could make working for the banksters or some right-wing agitprop outfit. Or at the very least he'd have more resources at his command to get his views heard.
Studies Show Cat Food and Caviar are Substitutes
written by Last Mover, December 12, 2012 9:59
Brooks Jackson is absolutely correct. A chained CPI index does capture the substitution of cat food for caviar consumed by those on SS.

Any economist can see that since cat food and caviar are perfect substitutes, a rise in the price of caviar would definitely overstate inflation given the availability of a quality equivalent good like cat food for which price does not change.

Stop COLA inflation now. Support a chained CPI. A loss of 3% in real SS benefits over a lifetime can be directly offset by a corresponding gain in the consumption of cat food by those willing to make choices.
ss bizaro world...
written by pete, December 12, 2012 10:03
In a few years I will start receiving a SS check about 3X what my mother was receiving last year....makes no sense to me at all. She could have used more, I could do with less. SS should be need based, plain and simple, phazed out against other sources of retirement income.
bizaro
written by coberly, December 12, 2012 10:41
pete

your proposal would turn SS into welfare as we knew it. SS works because it is NOT welfare. FDR insisted upon that for good reasons. Now if only the left could remember those reasons. Plenty of room for welfare if people need it... but don't kill what works by changing it into something that doesn't work nearly as well.
there is NO 'more accurate CPI'
written by coberly, December 12, 2012 10:46
There is simply no "accurate" way to calculate "inflation." And there is no need to. Workers pay for their own Social Security. Today's "young" will be tomorrow's "elderly" so there is no "generational conflict."

We can set the "inflation index" wherever we think it will provided "enough" for us in retirement without over taxing us during our working years. The difference in taxing between the chained CPI and the more honest version amounts to something like eight cents per week. Dean could do the calculation better than i can in a hurry, but it won't be much different than that.

In fact we can pay for our own Social Security, just as our parents did, even though we are going to live longer, by raising our own tax about eighty cents per week. This might be smarter than "demanding" the rich pay for it by scrapping the cap.
our parents did not pay for their ss
written by pete, December 12, 2012 11:30
taken in by the myth. it is a pay as you go system. there is no need for the top 25% or so to get ss. it should be replaced by old age insurance.

the best part of SS was the increase in the flat tax, a great non-distortionary tax. some proposals in the 80s and 90s were to replace the entire income tax with an even bigger flat tax, instead of just 12.5% on the first $100K. this would, of course, put Turbo Tax out of business.
your parents paid for their SS insurance
written by coberly, December 12, 2012 12:16
pete

actually it's you who have been taken in by the Big Lie. your parents paid for their SS out of every paycheck. the benefit they get is roughly equal to what they paid in plus about 5% interest. that's called paying for it in the real world.

pay as you go is just a very clever way to pay for it without exposing it to the dangers of inflation and bad days on the market. it IS insurance though, and those who end up "poor" after a lifetime will get maybe 10% interest on what they paid in, supplemented by the "rich" who will only get about 2% (real) interest on what they paid in.

since the top 25% paid for what they get, there is a very real need for them to get ss: they paid for it. and if they didn't pay for it, the poor would not get that "insurance benefit." they'd have to go on welfare. and we all know how that works. except of course the far left which never learns and can't imagine anything other than "tax the rich" as a way of preventing poverty.
Tax the rich, ...
written by David, December 12, 2012 1:52
... feed the poor, until there's no poor no more.

Taxing the rich may not prevent poverty, but can be used to level the playing field quite a bit. And face it, higher taxes are a lot less painful than some other ways that the masses exact their revenge for getting shafted by the top.
...
written by coberly, December 12, 2012 2:57
David

we have been taxing the rich to feed the poor for some time in this country. i am all for it. but when the poor rise up from their meal and start demanding the rich give them all of his money, i expect he is not going be overwhelmed by a feeling of charity.

you are right that "higher taxes are a lot less painful.." so why not raise your own social security tax eighty cents per week to pay for your own groceries after you can't work anymore.

nah, its more fun to dream of the masses "exacting their revenge..."

funny thing is, i am not an apologist for the rich, but the more i see of the stupidity on the left the more i understand where they are coming from.
...
written by JSeydl, December 12, 2012 3:36
Any economist can see that since cat food and caviar are perfect substitutes, a rise in the price of caviar would definitely overstate inflation given the availability of a quality equivalent good like cat food for which price does not change.


This from Last Mover made me laugh. But I do miss izzato. Last Mover, can you bring him back?
...
written by liberal, December 12, 2012 9:35
pete wrote,
the best part of SS was the increase in the flat tax, a great non-distortionary tax.


LOL. How is a tax on wage income that doesn't hit rents or profits "non-distortionary"?
That's what she said
written by David, December 13, 2012 3:32
... Marie Antoinette, that is. Coberly, I'm not dreaming political history. Violent uprisings fed by economic inequality and by arrogant wealth have led to some spectacularly bloody and shameful episodes in the evolution of the body politic. I'm not condoning it, just observing it.

Real wages as a share of productivity has stagnated/fallen since the early seventies. That trend is not sustainable, and will likely lead to violence, it most often has, though Gandhi is not yet forgotten.
the bitter end
written by frankenduf, December 13, 2012 8:13
yo JSeydl- Last Mover has apparantly toned down the polemic and went from sardonic to subdued- could it possibly be that isthatso fell in love?!
...
written by Last Mover, December 13, 2012 10:08
Oh Duffy, I knew you would understand, I just knew it!

Now I shall skip down the Yellow Brick Road and tell the Wizard that the war against stupid liberals is over, over I tell you, won with masculine sardonic satire without a shot fired.

Yours Till Death Do Us Part or the Fiscal Cliff, Whichever Comes First,

Dorothy
...
written by liberal, December 13, 2012 10:54
David wrote,
Violent uprisings fed by economic inequality and by arrogant wealth have led to some spectacularly bloody and shameful episodes in the evolution of the body politic.


My impression from history is that the people who tend to start and lead revolutions come from what is most analogous to our upper middle class, or maybe "middle middle" class.
signatures?
written by Barkley Rosser, December 13, 2012 12:52
Dean,

Went to your link but could not find list of signatories. If I had been asked (or if somebody will), I would be willing to sign it too.
Revolting
written by David, December 13, 2012 3:00
...
written by liberal, December 13, 2012 11:54
...
My impression from history is that the people who tend to start and lead revolutions come from what is most analogous to our upper middle class, or maybe "middle middle" class.


True. And why would this time be any different? The well-read organize the great beast so the beast (it hopes) suffers under a newer, less cruel master than the current one. Those suffering from malnutrition and debilitating health problems aren't generally organizers, but they know when their pain is un-necessary and, worse, unheeded. And the middle-class gets to see this up close instead of being secluded in the car-elevator-equipped home. Personally, I think Cubans are far better off overall under Castro then they were under the sugar barons, not that I like their method of governing better; it can definitely be improved. Often revolutions are fiascos, even if the outcome is stable. But sometimes they aren't.

I'm not suffering much myself the past 5 years or, should I live that long, the next 20. But I get to see plenty of preventable poverty and health issues (especially for children) here in the US, and it's needless and sickening. The largest GDP in the world and the kids in Slovenia outperform us in math and science; that's clearly a result of misplaced priorities of those with wealth and power.
OK
written by Barkley Rosser, December 13, 2012 4:55
Founnd signatures in first attachment. I feel left out that nobody asked me to sign, boo hoo hoo, :-(.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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