A Note On Escalation Requirements,Cost-of-Living Comparisons,and Homeownership Costs

Abstract

The correct procedure for indexing income transfers in social insurance programs such as social security depends on the escalation objective. In particular, implement ing the objective of maintaining the base period living standards of transfer recipients requires information on how the recipients' sources of income have changed as well as on changes in the cost of living. This article considers implementing this escalation objective for homeowners, to whom housing is a source of implicit income. In this situation, should homeowners be compensated for increases in living costs? The answer should, in part, depend on whether homeowners are fully hedged against increases in the cost of housing (when increases in housing costs are always fully offset by increases in potential rental income). The author argues that this hedging assumption is implacit in the "rental equivalence" approach to measuring housing costs for homeowners used in the consumer price index.