grams from an advance estimate of the BLS’s soon-to-be-published superlative index. Any divergence between that estimate and the superlative that appears 2 years later could be incorporated as a correction to the cost-of-living allowance provided for that year.

For example, the 2004 COLA would be based on the advance estimate of the superlative for the prior year plus or minus the difference between that estimate of the superlative for 2002 and the actual value of the superlative for that year. Independent of how the advance estimate of the superlative is arrived at, the panel supports its use.

This alternative offers both an advantage and a disadvantage when compared with the 2-year delay approach. There is a high probability that the later corrections to the initial COLA adjustment would be a good bit smaller if the advance estimate is used. But it would add an additional and hard-to-explain complexity to the index used for the initial adjustment.

Conclusion 7-2: On balance, the advantage of having much smaller corrections outweighs the disadvantage of the additional complexity.

Compensating Beneficiaries Who Have Other Income

Many social security retirees have other income, in some cases substantially exceeding their social security benefits. The broad objective of Congress in providing a cost-of-living adjustment was and is to protect the social security income of beneficiaries, and not their other income, against the consequences of price changes. In Chapter 2 we point out that it is not obvious how to design an index that holds constant the standard of living of social security recipients who have other income. Perhaps the simplest way of dealing with the problem is to define the index as one that provides the compensation needed to maintain living standards for those whose only income is their social security benefit.

The Role of Taxes

In its most usual formulation, a cost-of-living index provides a measure of the percentage change in expenditures a consumer would have to make to maintain a specified standard of living in the face of changes in the prices paid for goods and services. This is an expenditure COLI. An alternative approach is to measure the percentage change in the income a consumer would need to maintain that same standard of living as prices and income and payroll tax rates change. (Indirect taxes, such as sales and value-added taxes, are already included in the prices of private goods and services.) Such an index has sometimes been labeled a tax and price index (TPI; see Gillingham and Greenlees, 1987, 1990). Simply providing an additional amount of income sufficient to pay the higher prices, as



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