Chained Houdini

You have probably heard or read about the “chained-CPI” (CPI = Consumer Price Index) proposal for Social Security contained in President Obama’s latest budget plan.  Chained-CPI is supposed to take account of the “substitution effect,” i.e., the tendency of consumers to shift their purchasing habits away from goods that rise relative to others in price.  The official CPI which is now used for indexing Social Security and other federal programs – and is also used for the partial inflation adjustment in the UC pension – is often described as pricing a fixed basket of goods.  In actuality, the CPI has become more complicated than that description suggests.  However, the operative point is that chained-CPI empirically tends to rise somewhat more slowly than official CPI and thus, if Social Security were indexed to the former, payments would rise more slowly and there will be budgetary savings.

Current University of Calilfornia workers are under a combination of the UC pension and Social Security.  Some older workers and retirees may have opted out of the joint system when it was offered to UC employees and may just get the UC pension under a slightly different formula than those who opted in. (Or they may get some Social Security based on other eligibility.) 

Since the chained-CPI proposal is part of ongoing budget negotiations, whether it is adopted remains to be seen.  An interesting question is whether indexing of public pensions in California (including the UC pension) could be switched to chained-CPI.  My guess – that’s all it is – is that as long as the federal Bureau of Labor Statistics continues regular official CPI, public pensions could not be changed for existing workers under the state systems. If at some point, however, chained-CPI became the official CPI, indexing would be based on the chained version.  (CPI methodology has changed from time to time over the years and programs indexed to the CPI follow whatever the official index is.)

In any event, radio comedian Harry Shearer had a comment today about chained-CPI:

Update: [Click on link to pdf.]