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Inflation and pension plans

  1. Sep 30, 2006 #1
    Why is it that pension plans utilize the CPI when indexing for inflation and not the GDP deflator? Is this the preferable method in your opinion? Why? I know that both have their own pros and cons, so I'm not sure why the CPI for the purposes of pensions would be more favourable.
  2. jcsd
  3. Sep 30, 2006 #2


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    The CPI is intended to be a better representative of what people actually spend than the simple deflated dollar; technology changes what people buy over the decades, so the bundle of things bought, and the costs of buying them, changes too.

    You can't just say a "car" in 2006 costs x times as much as "the same car" in 1940; people want different things now out of their cars (seat belts, air bags), and society has mandated certain things as a matter of public health (no ethyl gas, which entails complexities added to the engine), and technology gives possiblities undreamed of in the earlier time (computerized engine control, allowing you to "program" your car for city or highway or hot and expensive vs. bland and cheap to run). All of this changes the price of a car in ways independent of the general inflation.

    The problem with the CPI is that it becomes politicised, and thus may go too long without updating, leading to skewed results. This cannot happen with the simple deflator, which is based solidly on available historic numbers.
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