For many years, some observers have argued that Social Security cost-of-living increases are too generous. They argue that the public fisc could save billions of dollars by using a "chained" consumer price index (CPI). The idea is that CPI increases should not be based on increases in the cost of a static market basket of goods because as the price of a product rises, consumers tend to substitute lower-priced products, use less of the product, stop using the product, etc.
In this LA Times article, Michael Hiltzik says that the chained CPI makes no sense for social security benefits for several reasons, one of which seems quite important: For the kinds of things that senior citizens need -- medical care, for instance -- it is often not reasonable to assume that there is a substitute product or that the person can do with less of it. (As Hiltzik puts it, "it's not as though you can forgo a prescribed heart bypass operation and opt for a cheaper hernia operation instead.") Moreover, the CPI underestimates inflation for seniors because medical care is a disproportionate part of their spending, and medical care "has risen in cost at nearly twice the rate of overall inflation over the last couple of decades." So, at the very least, you wouldn't want to go with a chained CPI until you fixed the CPI for seniors. Hiltzik's article talks about efforts to do that as well.
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