At least chained-CPI is chained to reality

The good folks at WonkBlog have been castigating the proposed move to a "chained-CPI" to slow the rate of Social Security benefit growth as "obscurantist,"  as Dylan Matthews called it this morning.  Three hours later, Ezra Klein elaborated the complaint:

Chained-CPI, in [Bowles-Simpson's] telling, is simply an effort to correct a measurement error in the way we calculate inflation. It’s a tweak, a fix, a policy designed to achieve a higher level of technical precision. And who could be against that?

There’s something to this line of argument. The way we measure inflation right now really does mismeasure inflation. Chained-CPI really is a bit more accurate. But that’s not why we’re considering moving to chained-CPI. If all we wanted to do was correct the technical problem, we could make the correction and then compensate the losers.

But no one ever considers that. The only reason we’re considering moving to chained-CPI because it saves money, and it saves money by cutting Social Security benefits and raising taxes, and it’s a much more regressive approach to cutting Social Security benefits and raising taxes than some of the other options on the table.

The question worth asking, then, is if we want to cut Social Security benefits, why are we talking about chained-CPI, rather than some other approach to cutting benefits that’s perhaps more equitable? The answer is that chained-CPI’s role in correcting inflation measurement error is helpful in distracting people from its role in cutting Social Security benefits.

Klein may well be right that there are better ways to cut Social Security than moving to chained-CPI and leaving benefits otherwise unaltered (or that we're better off not cutting Social Security benefits at all).  But there's something fundamentally wrong with his critique, too. If he's right on policy, he's wrong on semantics. And frankly, I'm still trying to figure out whether the semantic error may also imply a policy error.

Subtleties of life expectancy, cont.

Today, Aaron Carroll joins Ryan Grim and Jonathan Chait in highlighting a subtlety in the calculation of the effect of increased longevity on social security costs. Ever-increasing longevity has been used to justify raising the retirement age in the Bowles-Simpson deficit reduction plan (to 69 by 2075 for full retirement).  The catch is this: life expectancy for those who reach age 65 has risen far more modestly than life expectancy from birth:

First, if you made it to 65, even back in 1950, you could expect to be on Social Security for 14 years... life expectancy for someone who lives to 65 and qualifies for these programs, hasn’t gone up as much, or as quickly, as people think.

The reason that Social Security has become more costly is not nearly as much that people are living longer on the program, as it is that many more people were born into the generation approaching 65. They aren’t getting more benefit individually; as a group there’s just more of them. When you argue that you want to raise the age at which they start to 68, instead of 65, you’re basicly giving them as many years on the program as a person who hit 65 in the mid 1970′s. That’s a pretty big change [i.e., we've been getting more years in recent decades?].

There's a further subtlety, though, that's been left out of this discussion. It's true that life expectancy before age 65 does not affect the total size of the benefit that retirees collect.  I presume, however, that it does affect the ratio of active workers to beneficiaries -- though I will note at the outset that that ratio has been remarkably stable since 1975, ranging from 3.2 to 3.4 in every year except 2009, when it dipped to 3.0. And I would guess that that dip occurred mainly because the number of employed workers dropped so precipitously in the Great Recession. 

Annals of busted blog posts

I was going to propose an alternative to raising the social security retirement age: reducing the cost of living adjustment (COLA) as beneficiaries get older.  My thought was that as people get older, they spend less. And they do, except for one thing: health care. But that little exception does effectively kill the idea. Here's what I learned from a 2009 paper by Mariacristina De Nardi, Eric French, and John Bailey Jones:

Our model predicts that average out-of-pocket medical expenditures rise from $1,100 at age 75 to $9,200 at age 95. While a 95-year-old in the bottom quintile of the permanent income distribution expects to spend $1,700 on medical expenses, a person of the same age in the top quintile expects to spend $15,800. Medical needs that rise with age provide the elderly with a strong incentive to save, and medical expenses that rise with permanent income encourage the rich to be more frugal.

I was motivated by Ezra Klein's point* that raising the retirement age disproportionately affects lower-income Americans, whose life spans have not increased nearly as dramatically as the more affluent, and is particularly hard on those who perform bodily labor, which becomes increasingly excruciating with age. Better, I thought, to have a viable retirement income earlier, and only lose some growth in the payment gradually.  But never mind...