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Home Publications Blogs Beat the Press Correction for NYT Budget Piece: Economists Do Not Believe that a Chained CPI is a More Accurate Measure of the Cost of Living for the Elderly

Correction for NYT Budget Piece: Economists Do Not Believe that a Chained CPI is a More Accurate Measure of the Cost of Living for the Elderly

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Thursday, 11 April 2013 17:22

The NYT had a major article on the budget today which told readers:

"While many economists say the new formula is more accurate, opponents say it does not adequately reflect the out-of-pocket health care expenses that burden older Americans."

This comment is misleading since the issue with Social Security benefits is whether the chained CPI better reflects the cost of living of the population drawing Social Security checks. That is actually distinct from the rate of growth of out of pocket health care expenses, which would show that the cost of living for seniors as they age rises much more rapidly than the CPI.

There is good reason to believe that it does not. The Bureau of Labor Statistics (BLS) has an experimental elderly index that has consistently shown that the elderly experience a rate of inflation that is somewhat higher than the CPI that currently provides the basis for the annual cost of living adjustment. The main reason is that seniors spend a larger share of their income on health care and housing than the population as whole. Since these items tend to rise more rapidly in price, their cost of living rises somewhat more rapidly than what is shown by the current CPI.

It is also not clear that seniors substitute to the same extent as is assumed by the chained CPI. This would mean that a switch to a chained CPI would overstate the extent to which seniors benefit by substituting to goods that are rising less rapidly in price.

For this reason, many economists have advocated having the BLS construct a full elderly index which would track the rate of inflation in the specific items purchased by seniors at the stores at which they shop. This would provide a more accurate measure of the rate inflation seen by seniors.

It would have been useful if the NYT had made this point in its budget article. The comment about the views of economists on the accuracy of the chained CPI for the general population is at best misleading. It is not an issue that is relevant for the current debate.  

 

Comments (8)Add Comment
It's Not More Accurate For Anybody
written by PJR, April 11, 2013 6:02
I do not believe chaining, beyond the current BLS effort to account for substitution (without over-correcting) in calculating the CPI-U and CPI-W, is a more accurate method to measure inflation. Failure to correct for substitution would overstate inflation, but over-correcting would understate inflation. I'd love to see some clear-eyed analyses of this measurement problem because if the proposed chaining would systematically bias estimates of inflation as a concept, we shouldn't even be discussing it.
...
written by urban legend, April 11, 2013 7:42
Even apart from the CPI-W issue, BLS is the agency officially charged with the task of measuring changes in the cost of living. BLS apparently believes CPI-U is quite accurate and is more appropriate to be reported as its primary measure. By definition, that means CPI-U is more accurate.

Anyone who thinks the chained version is more accurate should take it up with BLS, not try to foist a secondary measure with at best semi-official status on only seniors, the disabled, veterans, and possibly, depending on details, by way of bracket creep, taxpayers who are mostly middle class or low income. It's a double-whammy of demand reduction -- just the ticket for economic health in a time of low demand.
New Cat Food on the Market Reduces Chained CPI Cost of Food for Seniors
written by Last Mover, April 11, 2013 10:48
The beauty of the chained CPI is it captures the offsetting increase in economic welfare from consuming more cat food by seniors as the price of beef and chicken increase, giving more weight to the rising budget share for cat food in the respective market basket of goods and services.

The cat food is marketed by Bowles and Simpson as "The Other Red and White Meat" for patriotic seniors who don't realize how much better off they are from substitutes provided by free markets.
Ah yes, but...
written by Ryan, April 12, 2013 7:16
The whole idea isn't to more accurately adjust Social Security payments. If it was, you would be correct. Accuracy was only a rationale advanced to cut Social Security because it was palatable. As it turns out, it might not be more accurate. Nonetheless, "some economists say" appears to be enough to keep the proposal alive.
Chained CPI More a Measure of Standard of Living than Inflation
written by Jesse, April 12, 2013 1:02

Chained CPI is much more a measure of the standard of living of a target group, than a true measure of inflation of prices.

This is because it does not include equivalent value in any of its calculations when it provides substitutes.

As such it is misleading wherever it is applied whether it be towards social security or tax bracket 'creep.'

Statists love to tinker with the measure of inflation, especially while they are sending wheelbarrows of money to their crony capitalist friends.
housing and health care confuse me...
written by pete, April 12, 2013 1:30
We have 65% homeownership, likely skewed to be higher with age. I would guess many seniors have very low housing costs. In addition, seniors get relatively free health care with Medicare, i.e., not paying $8,000 a year for health care like us working stiffs. Nonetheless, certainly changes to their SS should keep them whole, neither rewarding them nor punishing them through its adjustments. Most tragic about SS is that it is the same in Mississippi as it is in New York City. Regional differences far outpace intertemporal adjustments.
New link for the Goda et al paper
written by Patrick, April 13, 2013 6:42
The listed link for "the cost of living for seniors as they age rises much more rapidly than the CPI" takes you to a site that tells you to buy the book, in which the paper is just a chapter. Here is the link to the paper
itself that one can read and download if desired.

http://www.stanford.edu/group/siepr/cgi-bin/siepr/?q=system/files/shared/pubs/papers/pdf/08-059.pdf
Shocked to hear the NYT is careless with facts
written by Bud, April 13, 2013 11:15
...and no less shocked to hear politicians are also. But I repeat myself.

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About Beat the Press

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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