Economist Dean Baker recalls a discussion about Social Security and cost-of-living increases with The Washington Post’s Matt Miller (boldface mine):
I will always have fond memories of Matt Miller as the one person who left me completely speechless in a debate. The year was 1996 or 1997. Miller and I were on a public radio show debating the proposal, which was then popular in Washington, of reducing the annual cost of living adjustment for Social Security by roughly 1 percentage point.
Their argument was that the consumer price index (CPI), which is the basis of the indexation, overstated the true rate of increase in the cost of living. I was pointing out that the evidence for this claim was actually quite weak. Furthermore, such cuts would be a substantial hit to an elderly population that was already not doing very well.
One of the other guests on the show was Wyoming Senator Alan Simpson. In his usual tactful way, Simpson went on a tirade saying that the estimate that the CPI overstated inflation by 1.0 percentage point was way low. He said that it was more like 1.5 percentage points and that he has economists who say that it is more than 2.0 percentage points. He concluded by saying that pretty soon our grandchildren will all be living in chicken coops.
When I got a chance to respond I pointed out that Senator Simpson had it exactly backwards. The greater the overstatement in the CPI, the richer our children will be.
The logic here is straightforward. We know the rate of nominal wage growth, let’s say it’s 3.0 percent annually (this was the 90s). If the CPI tells us that the inflation rate is 2.0 percent, then the rate of real wage growth is 1.0 percent annually ( 3.0 percent -2.0 percent = 1.0 percent).
Suppose that the CPI overstates the true rate of inflation by 1.0 percentage point so that the true rate of inflation is just 1.0 percent. Then the annual rate of real wage growth is 2.0 percent (3 percent – 1.0 percent = 2.0 percent). If Senator Simpson’s economists were right and the overstatement was 2.0 percentage points, then real wages were growing at the rate of 3.0 percent annually (3.0 percent – 0.0 percent = 3.0 percent).
I pointed out that if Simpson was right about the CPI hugely overstating inflation, then our children and grandchildren would be incredibly rich. If real wages rise by 3.0 percent a year, then in 30 years they will be more than 140 percent higher. Therefore there was no reason to be so concerned cutting Social Security benefits for today’s elderly, most of whom would have grown up in poverty using the Simpson CPI.
Miller then responded by saying something to the effect that, “Dean thinks it’s okay to tax our children because they will be rich.” Yes, he had me stumped. I had no good response to that one.
Of course, the point Baker was making is that, if wages are higher, the revenue from the payroll tax will be higher, and Social Security would have adequate revenue.
Miller is viewed as a sensible centrist–which means he advocates programs that no democratic electorate able to exorcise its power actually wants.
This is yet another reason why can’t have nice things.