In Chapter 8 we note that simply switching to a democratic set of weights at the upper level of CPI aggregation would probably produce only modest differences in the behavior of the index. That was the result of a research index for the elderly constructed along those lines by the BLS for the years 1989 to 1997, as well as of other studies for various earlier periods (see Technical Note 2 in Chapter 8 for a brief summary of these studies). To the extent that systematic and important differences do exist, they must arise at the very detailed level of price collection. This possibility provides yet another reason for the research project we have suggested for investigating differences among households at that level.
Conclusion 7-5: To the extent that the evidence ultimately suggests significant differences between democratic and plutocratic indexes and demonstrates the feasibility of producing demographic indexes, the case for switching to such an index for compensation purposes is a persuasive one.
Some people have argued that social security benefits should be tied to a wage index (see, for example, Griliches, 1995). To the extent that the CPI is a reasonably good approximation to a cost-of-living index, a monthly retirement benefit adjusted for CPI inflation will “buy,” over the remaining life of the retiree, the same standard of living as it did on the date of retirement. The retiree receives protection against inflation and is insured against the economic vicissitudes that can erode the real wages and living standards of the working population—such as a large surge in energy prices or a major depreciation of the real exchange rate. With wage indexing, a worker or retiree gives up those protections but gains the advantage of sharing in the fruits of future national productivity growth and any other economic developments that improve real wages.
The choice between wage and price indexing thus involves issues of broad public policy with respect to the distribution of income between social security beneficiaries and the rest of the population. The panel was not charged with providing advice or recommendations on this distributional issue, but we were explicitly asked to assess “the appropriate uses of [cost-of-living] indexes for indexing federal programs and other purposes.” While a wage index is not a COLI, the panel believes that a comparison of wage and price indexation for social security recipients, in the light of various criteria of interest to policy makers, can significantly help illuminate some of the public policy choices implicit in the selection of an indexing instrument.
There are many possible wage indexes that might be employed for indexing purposes. They do not all move parallel with each other, even over long periods