Paul L. Caron

Monday, September 14, 2015

Shaviro: Automatic Indexing And Current Policy

Daniel Shaviro (NYU),  The More it Changes, the More it Stays the Same?: Automatic Indexing and Current Policy:

This projected chapter addresses issues associated with automatically indexing fiscal policies, such as those in the U.S. income tax and Social Security systems. Under indexing, a statistical measure - pertaining, for example, to inflation, wage levels, life expectancy, or income inequality - is used to determine changes to nominal legal rules that then take effect automatically. One possible reason for favoring automatic indexing is that it may keep the underlying policy, by some metric, "the same" as empirical circumstances change. While indexing often makes sense, from the standpoint of a policymaker whose long-term preferences it would keep in place barring further legislative action, identifying the set of "current policies" that one might want to perpetuate (or change) can be surprisingly difficult. 

The paper explores broader conceptual issues pertaining to policy continuity and competing objectives when legislation remains on the books indefinitely, with particular reference to examples drawn from the history of the U.S. income tax and Social Security.

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One problem is that it's hard to create an indexing scheme that takes into account all the necessary factors.

Social Security is a good example. Most retired people already own their homes, so any rise in the cost of housing only impacts them indirectly. On the other hand, many are living on savings and their lives are heavily impacted by low interest rates. Does a Social Security indexed for inflation take that into account?

Do the numbers. A retired couple with $500,000 in savings can get by, with help from Social Security, on the $25,000 a year they get when interest rates are at 5%. Drop those same rates to around 1%, like they are now, and they are only getting $5,000 a year. That means a lot of pain.

Pain that our current news media seems unwilling to report, given that there's a Democrat in the White House. In the latter case, it's apparently OK for grandmother to live on cat food.

Posted by: Michael W. Perry | Sep 14, 2015 7:27:59 AM