Everything you need to know about Chained CPI in one post [View all]

[HiPointDem]

Last edited Tue Dec 18, 2012, 01:06 AM - Edit history (1)

Here’s how it works: Numerous government programs, most notably Social Security benefits and the income thresholds for tax brackets, are indexed for inflation. But inflation can be measured in a number of ways. The tax code, for instance, uses CPI-U (Consumer Price Index – Urban), which measures prices for consumers in urban areas, to adjust the income cutoffs for different tax brackets. Social Security uses CPI-W, which is like CPI-U but only counts prices paid by urban wage-earners, not all consumers.

Various deficit-reduction frameworks, including Bowles-Simpson, Domenici-Rivlin and the Gang of Six plan, would convert all programs using CPI-U or CPI-W to a third measure — called C-CPI-U, or chained CPI. Most inflation measures, including CPI-U and CPI-W, track the price of a certain basket of goods. That basket could include, say, a year’s supply of propane. When propane costs go up, CPI-U and CPI-W include that as an increase in the cost of living.

But some people would just stop using propane if its price went up. They’d switch to electric heating, or a geothermal system, or a wood stove (Or nothing...). So their actual heating costs wouldn’t go up as much as CPI-U and CPI-W would suggest. Chained CPI attempts to take “substitution effects” like this into account. Thus, its number generally rises more slowly than other metrics.

That adds up to a big cut in Social Security benefits. Imagine, for example, a person born in 1935 who retired to full benefits at age 65 in 2000. According to the Social Security Administration, people in that position had an average initial monthly benefit of $1,435, or $17,220 a year. Under the cost-of-living-adjustment formula and 2012 inflation, that benefit be up to $1,986 a month in 2013, or $23,832 a year. But under chained CPI, the sum would be around $1,880 a month, or $22,560 a year. That’s a cut of over 5 percent, and more as you go further and further into the future...

The results by using chained CPI for taxes are also striking. The Tax Policy Center calculated the income tax increases that would be caused by a switch to chained CPI. They’re not big — a little more than $100 a year for most families — but they’re oddly regressive:



http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/11/everything-you-need-to-know-about-chained-cpi-in-one-post/


FUCK THIS CRAP.


Adding something poster "unblock" wrote on edit:

the substitution effect *isn't a part of inflation*. it's a measure of how people COPE with inflation....it's a measure how how people cope with inflation because their wealth and income isn't keeping up.

taken to an extreme, it's actually a measure of the rate of increase in SPENDING rather than prices. in the extreme, if your income is unchanged, and therefore your spending doesn't go up at all in response to price increases, you have to cope by completely substituting cheaper alternatives or just going without. theoretically a measure of "inflation" could show ZERO inflation in this scenario even though all prices went up.

http://www.democraticunderground.com/10022016967#post5