Who took food and Gas out of the COLA?

1 Dec

Recently, during a discussion, I heard something that didn’t sound correct.  The person stated that Reagan deleted food and gas from the Social Security Cost of Living Adjustments (COLA).  This required research, because this move was much more recent than Reagan.  In fact, the only change made to COLA during the Reagan administration was to change the cost of housing from mortgages to rents.  The reason was one that aided the Social Security recipient.  If you recall, the last years of Jimmy Carter and the first two years of Reagan, interest was in the 16% range.  While Reagan was gaining control of this “runaway inflationary spiral” bringing the interest rates down, it would have wiped out any COLA adjustments.  Since rents were more stable during this period, the cost of a mortgage was removed and rental costs were used, as they continue to be.

The big changes took place during the Bill Clinton administration.  The  administration and congress  funded  The Boskin Commission, formally called the “Advisory Commission to Study the Consumer Price Index”, which was appointed  to study possible bias in the computation of the Consumer Price Index (CPI), which is used to measure inflation in the United States. Its final report, titled “Toward A More Accurate Measure Of The Cost Of Living” and issued on December 4, 1996, concluded that the CPI overstated inflation by about 1.1 percentage points per year in 1996 and about 1.3 percentage points prior to 1996.

Note, as you read the report below, that except for the Reagan change noted above, no extensive evaluation of inflation measurement and changes took place since the Stigler Commission in 1961. So, to properly place blame on the removal of food and gas from the COLA, it appears that the Senate and the Clinton administration are to blame.  It is what the democrats love to have “shared blame,” because it was the first time in over 40 years that the republicans had a majority in the Senate. The natural effect from this removal was to help the Clinton administration take credit for balancing the budget.  If blame is shared, then credit should be shared, and the Republicans deserve credit for helping to balance the budget!

Boskin Commission

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The Boskin Commission, formally called the “Advisory Commission to Study the Consumer Price Index”, was appointed by the United States Senate in 1995 to study possible bias in the computation of the Consumer Price Index (CPI), which is used to measure inflation in the United States. Its final report, titled “Toward A More Accurate Measure Of The Cost Of Living” and issued on December 4, 1996, concluded that the CPI overstated inflation by about 1.1 percentage points per year in 1996 and about 1.3 percentage points prior to 1996.

The report was important because inflation, as calculated by the Bureau of Labor Statistics, is used to index the annual payment increases in Social Security and other retirement and compensation programs. This implied that the federal budget had increased by more than it should have, and that projections of future budget deficits were too large. The original report calculated that the overstatement of inflation would add $148 billion to the deficit and $691 billion to the national debt by 2006.

The report highlighted four sources of possible bias:

  • Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change.
  • Outlet substitution bias occurs when shifts to lower price outlets are not properly handled.
  • Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all.
  • New product bias occurs when new products are not introduced in the market basket, or included only with a long lag.

The members of the Boskin Commission were:

The Boskin Commission was the first extensive evaluation of inflation measurement since the Stigler Commission in 1961. Griliches was also on that commission.

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