One idea now making the rounds among some policy wonks is this: we can improve the social security system by changing the way adjustments to payments are made.
SS recipients now typically get a cost of living allowance (COLA) to keep their payments at a constant level of spending power. Something like that is a very appealing idea in a system where inflation is more a feature of the system than a bug in it.
But ... I'm sure I heard one of the contenders in the latest Republican Presidential debate saying. "We ought to link Social Security payments NOT to COLA, but to inflation. That would save some money and help preserve the system." In fact I think this was one of the relatively sane Republicans: Christie? Haley?
The proposition is NOT self-defeating in any obvious way. COLA is not the only possible index of inflation, after all. One could measure inflation literally, by the expansion of the money supply. (Although there are several distinct definitions of "money" that might be brought forward in the service of such a plan.) Or one could measure inflation by, say, the value of the dollar vis-a-vis an ounce of gold. One could set social security payments so that they offer the number of dollars that equals a constant amount of ounces-of-gold over time.
But this whole idea sets up a zero-sum game. The Treasury wins only what the recipients lose. After all, what recipients (not carried away by some ideological fervor or other) want from the system is that it cover ... their cost of living. If they have developed a lifestyle that their receipts do cover, then they want it to continue to cover that. To the extent a given COLA system works, it provides for THAT. To the extent that some alternative inflation indexing saves the Treasury money, it can do so only by cheating the elderly of that expectation.
Just a thought. I have something else debate-related to say tomorrow.
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ReplyDeleteI had thought that COLA was based on inflation, because the cost of living is based on inflation, but you make clear that the cost of living and inflation are two different things. Googling, I learn that the cost of living is the amount of money needed to cover basic expenses such as housing, food, taxes, and healthcare in a certain place and time period. I can see that the cost of living can change on the basis of factors other than inflation, such as the price of gasoline, which can go up or down based not only on inflation but on the price of Mideast oil. But since the price of gasoline can go down as well as up based on the price of Mideast oil, then could linking Social Security to inflation sometimes benefit Social Security recipients, because the cost of living might go down while inflation goes up?
ReplyDeleteAccording to one prevalent school of thought, inflation is by definition the increase in the money supply. This increase naturally causes prices (and wages) to increase. It would take some space for me to explain why this is so. I expect you can figure out the basics of it for yourself. Consider if when we woke in the morning everyone had twice the income we had when we all went to bed. Also, all prices, wages, fees, etc were smoothly adjusted accordingly. Nobody would be hurt by this. I would now pay $10 for something I would have paid $5 for before -- but I would have twice as much money, so that would not be any addition of hardship upon me. The fact that hardship causes harm derives, then, in large part from the fact that the increase in the money supply does NOT hit everyone equally. (there are other problems too, the confusion-of-calculations element especially). Further, it does not hit all accounts equally. It tends to punish savings in particular. I could go further, but the chief point is that inflation is cause and COLA is part of the effect. It would be possible to link social security directly to the increase in the size of the money supply. Usually, though, that would HURT the people who rely most on the social security checks. The proponents of such a change know this THAT IS WHY THEY EXPECT THAT THEIR REFORM WILL SAVE THE SYSTEM MONEY. Which is why they propose it.
DeleteHeather Cox Richardson's November 14 "Letters from an American" states:
ReplyDelete"Meanwhile, the Biden administration today celebrated the drop of the inflation rate to zero for the month of October, meaning that prices did not rise at all between September and October. That flat month means the yearly inflation rate dropped to 3.2% for the past year. Much of that lower inflation rate reflects lower gasoline prices, which dropped 5% in October."
It appears that I shouldn't have referred to "factors other than inflation, such as the price of gasoline." They apparently rise and fall in tandem.