This brief examines different price indices that might be used to adjust Social Security benefits for changes in the cost of living. The currently used consumer price index for wage and clerical workers (CPI-W) is probably biased upward. A new experimental "chain" index removes some of the upward bias and therefore rises more slowly. Using it would help solve some of Social Security's long-run financial problems. Another candidate is an experimental index designed to reflect the purchases of the elderly. Largely because it heavily weights health costs, it is likely to rise faster than the CPI-W.
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Late last year Social Security recipients were shocked to hear there would be no cost-of-living adjustment
(COLA) for their 2010 benefits. Many complained, even though government statisticians had decreed there
had been no increase in the cost of living. It was the first time without a COLA since benefits were first
indexed for inflation in the early 1970s.
This rare episode drew attention to
how we adjust government benefits
and our income tax system for
changes in living costs. The adjustment
process can only provide an approximation,
because there is no such thing as
a cost-of-living index. The consumer price
index (CPI) is used to make COLA adjustments
and the Bureau of Labor Statistics
(BLS) does its best to make the CPI
an approximation of the cost of living.
They have made significant improvements
in recent years, but they will never attain
Basically, we would like to know how
many dollars it takes to attain a given level of
well-being and how the amount changes
from month to month and from year to year.
Given that well-being is an intensely personal
concept and is not really measurable, no simple
index can be used to adjust accurately for
changes in living costs.
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