Why the stats don’t add up
November 18, 2013
The Bureau of Labor Statistics is responsible for calculating and then reporting many of the economic statistics that the government uses to determine entitlement payments to Social Security and Disability recipients.
When inflation is reported to be increasing, the government adjustments payments upward to assist the recipient in meeting their purchasing needs.
For Social Security recipients, this adjustment to the paycheck is known as a cost-of-living adjustment.
The higher the reported inflation from the Bureau of Labor Statistics, the higher the increase is paid to Social Security recipients and subsequently the higher the cost to the government.
Although there are many methods to calculating inflation, the Bureau of Labor Statistics currently uses what is known as the Consumer Price Index. This index relies on a complicated method of calculating price increases on a wide variety of goods and services over a particular time frame to arrive at a conclusive rate of inflation. This figure is then used by Social Security to determine how much to increase checks for COLA.
The Consumer Price Index excludes food and energy costs, which is puzzling (they are thought to be too volatile), and uses a variety of "adjustments," which also raise an eyebrow or two if the real reason behind the calculation is to protect recipients against the ravages of inflation.
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A "substitution" adjustment replaces an item that increases in price with a lesser priced item. For example, although most foods are not included in this calculation, if the price of steak goes up, the substitution adjustment would assume consumers would buy hot dogs instead. The price of the hot dog is then used in lieu of the higher priced steak. Taken to the extreme, it could be argued that one could be reduced to eating pet food and living out of a cardboard box because of inflation, yet the Bureau of Labor Statistics would calculate inflation on the cost of the box and the bag of kibbles.
All things considered, it could be said that the Consumer Price Index is not a true measure of inflation but instead reflects only the cost of survival.
Another adjustment made to the Bureau of Labor Statistics calculation is "geometric weighting." If an item rises in price, the bureau counts less of it percentage-wise. An example would be if steak was 5 percent of the calculation and it rose in price, the Bureau of Labor Statistics might now reduce its percentage in the calculation to 3 percent. Naturally this reduces the effect the increase in the steak's price had on the overall inflation calculation.
There are a host of other adjustments hat have been added over the years that have made the Consumer Price Index resemble little of what it did a few decades ago. Since the early 1970s, almost every administration has added another adjustment or two to "improve" the final result. As a result, every time the inflation data is revised downward because of such adjustments, the government saves billions in COLA increases.
Not to be overshadowed by previous administrations, Obama is pushing to have the current Consumer Price Index method replaced with the "Chained CPI". The Chained CPI applies its "adjustments" more often. This would result in an even lower rate of reported inflation and over time would save the government hundreds of billions. The savings would, of course, come from even lower payments to Social Security recipients. Add in the compounding reduction in Social Security checks over time and the savings to the government becomes massive, as does the losses to the recipients.
This article expresses the opinions of Marc Cuniberti. He hosts "Money Matters" on KVMR FM 89.5 and 105.1 FM on Thursdays at noon. His website is http://www.moneymanagementradio.com.