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CPI vs chained, not a big deal
Old 12-16-2017, 09:40 AM   #1
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CPI vs chained, not a big deal

As the new tax brackets will be adjusted with chained CPI, I was assuming it will have a huge impact on my future tax, and I should do aggressive tIRA to Roth conversion when possible.

I used CBO estimate that chained will be 0.25% lower, and I assume inflation will be at 3%. Currently I have around 25% of my investable in tax advantage account. I will spend down all my investable by 2065.

But my simulation shows very minimal difference between chained and CPI.
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Old 12-16-2017, 09:49 AM   #2
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Correct me if I am wrong but won't it be easier to lower the chained CPI in the assumptions than in the regular CPI? Are there concrete rules for the calculation?
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Old 12-16-2017, 10:22 AM   #3
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It seems like if tax brackets go up with chained CPI, but income goes up with regular CPI, you are better off with chained CPI.

Chained CPI should go up slower.
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Old 12-16-2017, 12:19 PM   #4
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Huh? Why wouldn't I prefer the bracket to move at the same rate as my income (or at a faster rate) to keep me in the lower bracket? (The top of my bracket remains higher than my current income.)
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Old 12-16-2017, 02:30 PM   #5
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It seems like if tax brackets go up with chained CPI, but income goes up with regular CPI, you are better off with chained CPI.
I don't see how reaching the next higher bracket sooner can make you "better off".

I think you have this backwards.
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Old 12-16-2017, 03:00 PM   #6
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.

Chained CPI is also a negative for the standard deduction.
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Old 12-16-2017, 03:00 PM   #7
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The big question of course is what will inflation in general look like. If it stays low then the difference will be small all be it growing over 20 years. If inflation gets high then the difference could amount to up to a percent a year.
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Old 12-16-2017, 03:03 PM   #8
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I don't see how reaching the next higher bracket sooner can make you "better off".

I think you have this backwards.
+1 backwards
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Old 12-16-2017, 03:06 PM   #9
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The big question of course is what will inflation in general look like. If it stays low then the difference will be small all be it growing over 20 years. If inflation gets high then the difference could amount to up to a percent a year.

We have been at unusual historically low inflation for a decade.
It won't last. Maybe that is why the Chained CPI was chosen.

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Old 12-16-2017, 03:58 PM   #10
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Back to my original concern. It bothers me that, if they can say I substitute cars for motorcycles, then, if they don't like the budget numbers, they can decide most people prefer to make the substitution of cars for walking shoes. An exaggeration, I realize, but the chained CPI seem more malleable than a straight CPI. What are the bounds of the assumptions made in the chain, if any?
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Old 12-16-2017, 04:19 PM   #11
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+1 backwards
You guys are both right. I do not want my income to go faster to the next bracket.

In the end, 0.5% a year is probably not that big of a deal, better than a readjustment of the actual brackets to add 5% to them.
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Old 12-16-2017, 05:18 PM   #12
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Originally Posted by Tadpole View Post
Back to my original concern. It bothers me that, if they can say I substitute cars for motorcycles, then, if they don't like the budget numbers, they can decide most people prefer to make the substitution of cars for walking shoes. An exaggeration, I realize, but the chained CPI seem more malleable than a straight CPI. What are the bounds of the assumptions made in the chain, if any?
No limits really, this is my plan for high inflation:

Steak -> hamburger -> chicken -> tofu -> eggs -> grains -> grass clippings -> water -> air.

which is why I think it's just a sneaky lying way of saying we aren't going to keep up with inflation. An honest way would be to say CPI minus x%, instead of pretending substitution of x for y is equally as good and can go on forever.
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Old 12-16-2017, 05:21 PM   #13
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We have been at unusual historically low inflation for a decade.
It won't last. Maybe that is why the Chained CPI was chosen.

.
I don't know, the long-term U.S. inflation rate is about 2.25%, which is only a quarter point above where we are now. I think people's view of inflation is still colored by the '70s, which were unusually historically high.

Visual data here: US Inflation Rate
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Old 12-16-2017, 06:08 PM   #14
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I don't know, the long-term U.S. inflation rate is about 2.25%, which is only a quarter point above where we are now. I think people's view of inflation is still colored by the '70s, which were unusually historically high.

Visual data here: US Inflation Rate
Interesting that goes back pre-1880. I'm sure there is much older data too. I can't even wrap my head around how you can compare prices of stuff we spend money on now versus what they spent money on way back then. What goes in the basket of goods?!
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Old 12-16-2017, 06:14 PM   #15
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I don't know, the long-term U.S. inflation rate is about 2.25%, which is only a quarter point above where we are now. I think people's view of inflation is still colored by the '70s, which were unusually historically high.

Visual data here: US Inflation Rate

Colored, maybe... but not just from the 70s.

In the 60s when I was in elementary school my teacher took our class to the local bank on the town square to open basic savings accounts [the only kind they had back in the stone age.] The interest rate was 4%.

In the 1980s CDs at my bank were paying well over 10%.

The famous book, "Your Money or Your Life", advocated early retirement living on your nest egg's interest... which at the time was earning about 10% interest.

I think it was in 2007 Chase Bank offered a 5 year CD at 5%. I emptied my piggy banks and uprooted seat cushions to take advantage of that amazing offer.

In 2007/2008, the US government sold EE savings bonds at a fixed 3%. I also took advantage of that offer up to the limit.

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Old 12-17-2017, 07:17 AM   #16
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+1 backwards
A digression this reminded me of. About 50 years ago I was smoking a joint with a buddy and got into an argument about day light savings time. It was in the spring and I said we had to move the clock back. We argued for about ten minutes until the light bulb lit up in my head and I realized I had it backwards. A year later, engaged in the same pastime, I reminded him of our previous argument where I mistakenly thought you should move the clock forward. He pointed out that I had mistakenly argued that you should move the clock back. I pointed out that moving the clock back is correct > off to the races for another ten minutes until I once again had the aha experience. Ever since then I just repeat the mantra "spring ahead, fall behind" and try to avoid thinking about it.
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Old 12-17-2017, 07:41 AM   #17
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Well, we shall see, won't we.
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