July 24, 2011

How Do You Like Those Apples?


A new proposed method for determining Cost of Living Adjustments (COLA) for people receiving Social Security and federal and military retiree pensions is called the Chained Consumer Price Index (CPI).

The Federal Times (18 July 2011) reports that "proposed COLA changes would mean smaller annuities for retirees."

Essentially, the Chained CPI doesn't just look at the change in prices for "market basket" of goods, but it "takes into account...the fact that most consumers change their buying habits when prices go up."

What this means in a simple example (exaggerated for effect) is that:

If the price of an Apple goes up from $1 to $2 instead of COLA being adjusted so that retirees get $2 for the apple, we give them instead maybe $1.25, since we ASSUME that because the price of apples went up "people are likely to buy fewer apples or switch to a cheaper fruit."

Does that sound right from your shopping experience?

Are you going to buy fewer apples or are they sort of a necessity? Further, if the price of apples goes up, is it not likely that the price of other common fruits will go up in an inflationary environment as well.

This proposal which is estimated "to save $300 billion in its first decade" sounds like quite the fuzzy economics indeed.

So how do you like those apples?

(Source Picture: here)


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