THE BLOG
04/29/2013 01:20 pm ET Updated Jun 29, 2013

# Why Is Chained CPI important? It's Not -- A Better Way to Fix Social Security

OK, so what is the chained CPI and why should you care? You shouldn't, really. Because it's trying to answer the wrong question. The question is, how can we reduce the costs of Social Security over the long term? The chained CPI answer says that if we adjust the cost of living adjustment (COLA from here on out) down a smidge, the long term effect will be lower overall costs in the program. True, but that's not the only way to lower the costs, and it isn't the most effective. It's just a way that Republicans suggested a few years ago, and the president is offering it up as a token to get the negotiators to the table.

So what is a better way? Well, first you have to approach a little math. One of my favorite quotes is from a professor at University of Colorado, a Dr Al Bartlett. Dr Bartlett has been giving talks to students and concerned citizens for years about the problems with growth, all kinds of growth, and his favorite saying is: The greatest shortcoming of the human race is our inability to understand the exponential function.

The reason this is important in regards to COLAs is that a percent increase applied annually is an exponential function. And the thing about exponential functions is they blow up after awhile. This is favorite example -- I convince you that I will work for a penny today, if you'll double my pay everyday -- 2 cents, then 4, then 8 and so on. Sounds good doesn't it? So you agree. On the 30th day you will pay me over \$5 million dollars. That's an exponential function. Pretty sweet if you are on the receiving end. Disaster if you are on the paying end.

A better way to increase something is to set a fixed amount, and add it to the original. So in the last example, you would like to increase my pay a penny a day -- I'll get 1 cent, then 2, then 3, then 4. On the 30th day, I'll get 30 cents. I won't likely accept that wage.

For the COLA, instead of an annual percent increase, which rewards some hugely and others not so much, we should determine a fixed amount of increase, and assign everyone that same increase. If we decide the COLA has gone up 1.4 % for the average urban wage earner making \$40,000, that's a \$560 increase (40,000 x .014 = \$560). If our income's range from \$20,000 to \$200,000, and then our new incomes will range from \$20,560 to \$200,560 not \$20,280 to \$202,800. Under a fixed amount increase, we all rise with the tide equally -- the difference between our incomes remains fixed, instead of escalating apart where the richer get richer and the poorer lag farther and farther behind.

And the problem with the cost of the Social Security program identified in the first paragraph? It's not subject to exponential increases any more, and the annual increase cost is reduced about 10 percent. That's a savings worth talking about.