How Would Cost-of-Living Adjustments Affect Real Estate and You?

By Randy Alan Weiss Journal Record Correspondent | THE JOURNAL RECORD, August 29, 1997 | Go to article overview

How Would Cost-of-Living Adjustments Affect Real Estate and You?


Randy Alan Weiss Journal Record Correspondent, THE JOURNAL RECORD


In the `70s, through government generosity, we saw more social programs like Social Security appear. The `80s were supposed to simplify and reduce these programs, but never did.

We saw payroll taxes increase faster and faster. The past several years of this decade failed to reverse this trend.

However, through the cooperation of the White House and Congress, the cost of these programs is likely to be reduced by making certain simple adjustments in the cost of living. What does this have to do with your business? Well -- aside from the fact that neither payroll nor income taxes are likely to be reduced -- a lot, if you're a landlord or a tenant. At issue is the consumer price index -- known better as the CPI -- that intangible product publicized regularly by the Bureau of Labor Statistics of the U.S. Department of Labor. The CPI is used to set cost-of-living increases for Social Security and other federal social benefit programs as well as to make adjustments in certain Internal Revenue Service code provisions. But, according to a recently released study, the CPI has simply failed to measure correctly what it was supposed to measure -- cost- of-living increases. Experts tell us that the CPI has overstated increases in the cost of living by about 1.1 percent. With that in mind, a bipartisan presidential commission has decided that it would be better to forcibly reduce the calculation by a set percentage, saving the federal government significant funds. Politicians argue that the current CPI index system overcompensates benefit recipients and, if a 1 percent CPI reduction is made, savings of more than $54 billion could be realized by the year 2002. Tying leases to CPI Mindful of double-digit inflation in the Carter and post-Carter years, property owners tied leasing rates to increases in the CPI. Older leases provided for set terms with set increases. This, of course, provided for some regularity and consistency for both parties. But when investments other than real estate began offering significantly higher returns -- like equities and the bond market -- real estate had to respond. This resulted in including CPI increases, but typically not decreases, to give a hedge against inflation, usually limiting increases to 50 percent of the CPI increase. …

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