would be the case under an expenditure COLI, would not be enough if that income were subject to higher tax rates. A TPI would include the effect of higher income and payroll tax rates and, if used for compensation purposes, would therefore provide enough compensation to cover both the higher taxes and the higher prices. (The domain of a TPI is restricted to private goods and services; it does not impute to the consumer’s living standard any value from public goods financed by taxes.)
What are the implications of tying social security payments to a tax-and-price index rather than the current expenditure-based index, assuming that a single overall CPI would continue to be used for indexing purposes? First, social security retirees pay no payroll taxes; and in the federal and many state income tax systems social security benefits are more lightly taxed than other forms of income, at least for low- and lower-middle-income taxpayers. It is likely that legislative changes in tax rates would retain the same sort of preferences for the elderly. A TPI would, therefore, be likely to overadjust social security benefits when tax rates generally are raised and have the opposite results when taxes are cut. If Congress wishes to change the after-tax benefits for social security recipients, a much fairer and more effective way to do so is through explicit changes in the tax code or benefits formula.
Second, the use of an index that reflects changes in tax rates would be inequitable among social security recipients themselves. Legislated changes in income tax rates often vary among people with different incomes and in different economic circumstances, while an overall income COLI would reflect only an average of the rate changes: some beneficiaries would be overcompensated and others undercompensated.
Conclusion 7-3: For purposes of indexing social security and other benefits, shifting from the current expenditure-based CPI to a tax-and-price index that reflected changes in income and payroll tax rates would pose some difficult measurement problems and create unintended distributional inequities.
To the extent that prices for goods and services paid by the elderly rise at a different rate than those paid by the population generally, Congress might consider tying retirement benefits to a special index for the elderly. At the request of Congress, BLS developed a special experimental index for the elderly (CPI-E) in which the prices of the 200-plus categories of goods and services in the regularly published CPI-U were reweighted to reflect the consumption patterns of the elderly. From 1984 to 1995 the experimental index rose by an average of 0.4 percent per year faster than the CPI-W, which is used to index social security benefits, and by 0.3 percent per year faster than the CPI-U. Several outside