Can changing the consumer price index solve Social Securitys problems?
Many economists believe the government’s consumer price index (CPI) overstates inflation. One commission concluded recently, for example, that the CPI may overshoot the actual inflation rate by more than one percentage point.175 If true, this has a profound impact on Social Security because of the annual cost of living adjustments (COLAs) received by beneficiaries. If COLAs were reduced to correct for this alleged inaccuracy in the CPI, the reduction in future benefit payments would be so immense that the unfunded liability would be reduced dramatically.176 Before rushing to make any changes, however, policymakers should realize that adjusting the CPI would reduce the long-term deficit problem by making the rate-of-return problem worse. Social Security is a wretched deal for future retirees. If the level of benefits is reduced further by changing the CPI, the cost to workers of remaining in the government system—compared with what they could get under privatization—will skyrocket. Q: I
