might wish to consider using a separate index for the affected group as the measure of compensation.

There is no abstract criterion that can be used to determine the extent to which compensation should be tailored to particular subcategories of individuals within each broad group of targeted transfer recipients. In general, the panel believes that, if a particular category of individuals is not itself the target of a transfer program, special indexes based on detailed distinctions within the targeted groups are not a suitable basis for making cost-of-living adjustments. In the sections below, we discuss the potential use of special indexes for making cost-of-living adjustments for the elderly and the poor.

Adjusting Social Security Benefits

The most prominent public policy use of the CPI is for indexing benefits paid to social security retirees. Prior to 1972 Congress had periodically legislated increases in social security benefits, usually by more than enough to cover changes in inflation (as measured by the CPI) since the last increase. In 1969 the Nixon Administration announced its support for automatic indexing of benefits, declaring: “The way to prevent future unfairness is to attach the benefit schedule to the cost of living” (cited in Berkowitz, 1986:48). In 1972 this recommendation became law (along with a 20 percent one-time increase in benefits). Congress explicitly provided for annual cost-of-living-increases for people receiving benefit payments, based on changes in the CPI-W.3 The CPI is also used for the same objective in a number of other federal programs that provide transfer payments: for the military and civil service retirement systems, the railroad retirement system, veterans’ pensions, and Supplemental Security Income.

When it established an indexing procedure, Congress stipulated that benefits be adjusted to offset changes in the cost of living (rather than simply to maintain the purchasing power over a fixed basket of goods) and specified that this should be done through the use of the CPI. At the time, members of Congress appeared to have accepted the widely held presumption that the CPI measures the cost of living. There is no reason to believe they explicitly considered any distinction between a fixed-weight and a cost-of-living index.

The panel was not charged with recommending to Congress what specific objectives it ought to pursue in indexing social security and other benefits. We were charged to make clear the implications for public policy that flow from choosing one or another scheme of indexing and to spell out the consequences for public policy from alternative choices of index design. Moreover, even assuming

3  

Various modifications have been made in the timing and details of the adjustment, but the cost-of-living terminology remains. No provision is made for decreases in benefits when the CPI declines (P.L. 92-336).



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