NOTE ON ESCALATION REQUIREMENTS, COST-OF-LIVING COMPARISONS, AND HOMEOWNERSHIP COSTS

The correct procedure for indexing income transfers in social insuranc e programs such as social security depends on the escalation objective . In particular, implementing the objective of maintaining the base pe riod living standards of transfer recipients requires information on h ow the recipients' sources of income have changed as well as on change s in the cost of living. This article considers implementing this esca lation objective for homeowners, to whom housing is a source of implic it income. In this situation, should homeowners be compensated for inc reases 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 i n potential rental income). The author argues that this hedging assump tion is implicit in the ''rental equivalence'' approach to measuring h ousing costs for homeowners used in the consumer price index.