Peter Coy

In the Face of Inflation, Let’s Give Everyone a Lift

Inflation too hot for you? How about a nice, refreshing COLA? This time, not just for Social Security recipients, who found out about their 2023 cost-of-living adjustments on Thursday.

We’ve come to expect that certain people will be protected from inflation by cost-of-living adjustments and others won’t. But there’s a good case to be made that COLAs should be universal, covering all wages, all pensions and even all bonds.

On Thursday, the Bureau of Labor Statistics reported an alarmingly high inflation rate for September. The headline number was an increase in the overall price level of 8.2 percent from a year earlier. The more problematic data point was an increase of 0.6 percent in core prices (excluding food and energy) in September from a month earlier. It was the second consecutive 0.6 percent rise, dashing hopes that inflation was beginning to lose steam.

The roughly 70 million people who receive Social Security or Supplemental Security Income will be largely shielded from the past year’s inflation surge by the COLA announced on Thursday: an 8.7 percent increase in monthly benefits next year. The COLA isn’t perfect — for one thing, it comes just once a year, and in the meantime inflation erodes the real value of those government checks. On the whole, though, the cost-of-living adjustment is an extremely valuable government benefit.

Ninety percent of state and local employees get at least partial protection from inflation in their pension plans, according to Jean-Pierre Aubry, the associate director of state and local research at Boston College’s Center for Retirement Research. But almost no private sector employees get COLAs in their defined benefit pension, if they even have one, Aubry said. So their pensions’ values shrink with every passing year.

Likewise, most people’s wages and salaries are not formally indexed to inflation. Unionization has declined, and fewer workers who are unionized are covered by cost-of-living adjustments. “In 1976, 61 percent of union workers covered by major collective bargaining contracts had COLA provisions, but by the end of 1995, when the US Bureau of Labor Statistics stopped collecting data on collective bargaining settlements, COLA coverage had fallen to 22 percent,” according to a paper published in 2000 by James F. Ragan Jr. and Bernt Bratsberg, then of Kansas State University. The share is undoubtedly lower today.

Then there are the bonds whose values are eroded by high inflation. Many older Americans rely heavily on bond income for retirement, either directly or because bonds are stuffed into the portfolios of the pension funds and annuities that provide them with income. Why aren’t bonds indexed for inflation? That’s a trick question, because some are. In the United States, the Treasury Department has been issuing Treasury inflation-protected securities since 1997 and Series I savings bonds since 1998. But they haven’t been very popular. Last year TIPS accounted for less than 8 percent of the Treasury’s marketable securities.

I interviewed Laurence Ball, an economist at Johns Hopkins University, on the day of the twin announcements about September inflation and the Social Security COLA. He wrote about COLAs in the 1980s. “I do sort of feel like I’m in a time machine back to my youth, when people were more interested in these issues,” he said when I called.

“Economists for a long time have thought that indexation is clearly a good thing,” Ball said. That word, “indexation,” is what the Social Security COLA does — it adjusts payments to the change in a Consumer Price Index. It protects the real value of the payment, “real” meaning after adjusting for inflation.

“What people really care about is their real wages, pensions and interest rates,” Ball said. “Indexation is just kind of a no-brainer way to solve that problem, and that’s what they’ve done with Social Security.”

Ball said that when inflation was low people cared less about cost-of-living adjustments, so some of them fell by the wayside. That may change now that inflation has rocketed to its highest rate in four decades, he said.

According to the Center for Retirement Research, there are four flavors of COLA (excluding — dad joke — zero sugar and zero caffeine). There are payments that have a fixed annual rate of change, ones like Social Security that are tied to an index, ones that are set ad hoc — for example, by a legislature — and ones that are tied to the performance of investments.

There’s a theory that COLAs could contribute to high inflation by insulating people from its consequences and that way making them less determined to resist it by, say, not buying something they think is overpriced. “If a nation with our traditions attempted to make it easy to live with inflation rather than resist its corrosive influence, we would slowly but steadily lose the sense of discipline needed to pursue governmental policies with an eye to the permanent welfare of our people,” the former Federal Reserve chair Arthur Burns said in 1978.

In 1989, the economists Stanley Fischer and Lawrence Summers wrote that by trying to make inflation painless, governments “may end up by increasing inflation and reducing welfare.” Indexation only makes possible sense for governments with “impeccable anti-inflationary credentials,” they wrote.

Ball said he doesn’t necessarily buy Fischer and Summers’s conclusions; they remind him of the argument that seatbelts don’t save lives because the safety they provide just leads people to drive more recklessly.

Besides, there’s something cruel about telling people that they’re going to be exposed to the ravages of inflation to make them fight harder against it. It’s the economic equivalent of dragooning soldiers into a war they don’t want to fight, to use a metaphor that the Russian president, Vladimir Putin, would understand. A round of COLAs for everyone, please.

The New York Times