A Decent Article on How Bush’s Social Security Plan Would Work

Kathleen Pender does a pretty decent job outlining how the reductions in benefits would work with Bush’s proposal for Social Security. My only beef, and it is a bit of a nitpick, is this part,

After you retire, your monthly benefit will be adjusted each year by the change in the consumer price index, calculated by the Bureau of Labor Statistics. This is commonly known as the cost of living adjustment, or COLA.

Not quite true. The CPI is a Consumer Price Index and is actually the upper bound on a COLA for numerous reasons. One reason is outlined in the article which is the substitution effect when prices rise. COLA’s take into account substitution, price indices do not. Another reason for the “upward bias” in some price indices such as the Laspeyres index is that such indices do not treat price increases and decreases symmetrically (price increases are given more weight). There is an experimental CPI that uses an index that does not have this problem, the geometric means index. Anyhow, enough of this. If you’ve read this far you know more than you probably wanted to know about price indices.

FILED UNDER: General
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

A Decent Article on How Bush’s Social Security Plan Would Work

Kathleen Pender does a pretty decent job outlining how the reductions in benefits would work with Bush’s proposal for Social Security. My only beef, and it is a bit of a nitpick, is this part,

After you retire, your monthly benefit will be adjusted each year by the change in the consumer price index, calculated by the Bureau of Labor Statistics. This is commonly known as the cost of living adjustment, or COLA.

Not quite true. The CPI is a Consumer Price Index and is actually the upper bound on a COLA for numerous reasons. One reason is outlined in the article which is the substitution effect when prices rise. COLA’s take into account substitution, price indices do not. Another reason for the “upward bias” in some price indices such as the Laspeyres index is that such indices do not treat price increases and decreases symmetrically (price increases are given more weight). There is an experimental CPI that uses an index that does not have this problem, the geometric means index. Anyhow, enough of this. If you’ve read this far you know more than you probably wanted to know about price indices.

FILED UNDER: General
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.