Social Security just announced the cost-of-living adjustment, COLA, for Social Security, and the news is bleak. Social Security benefits are barely rising. The typical older adult receiving benefits will see only a $4.00 increase in her monthly check. A new report from the National Academy for Social Insurance explains what you need to know about how Social Security benefits are calculated.
In short, the COLA is supposed to ensure that people receiving Social Security checks continue to have the same purchasing power from one year to the next notwithstanding price inflation. Older adults in particular need this inflation protection since their savings and other income tends to fall as they age, including their pensions, and their dependence on Social Security increases. But, the Social Security COLA is not delivering adequate inflation protection to older adults.
Here’s the history: The COLA was enacted into law in 1972 to guarantee people receiving Social Security annual inflation protection. But, the Bureau of Labor Statistics (BLS) produced only one Consumer Price Index or CPI to measure inflation. So, Congress used it to calculate the Social Security inflation adjustment even though it is not based on price inflation older adults experience. The CPI is based on the price inflation city workers and clerical workers experienced (28 percent of the population).
In 1978, the Bureau of Labor Statistics created a new CPI to cover all people living in cities, nearly nine in ten people in the country. It gave it a new name, CPI-U. But, Congress did not use this definition for Social Security cost-of-living adjustments. Congress uses it to calculate people’s individual income tax brackets and poverty levels.
In 1988, the Bureau of Labor Statistics created yet another experimental CPI index to cover spending of people 62 and older. It named it the CPI-E. But, again, Congress did not use this definition for Social Security cost-of-living adjustments.
Then, in 1999, the Bureau of Labor Statistics changed the way it measured inflation by assuming that when prices go up for a particular item people will buy a different similar item. For example, if the price of chicken goes up, people might buy pork instead. Through this change, the BLS measures for inflation reflect slower growth. It’s called the CPI-W. As a result of this change, the CPI-W, the basis for Social Security cost-of-living adjustments from one year to the next, reports lower inflation than it otherwise would.
In 1999, the Bureau of Labor Statistics also began looking at a “chained” measure, one that takes into consideration that, when prices rise, people might make tradeoffs not only between similar items but between different needs. For example, if rent goes up, people might spend less on travel. This chained measure, further slows the rate of growth of the CPI by .3 percentage points. It’s called the chained CPI-U.
Republican leaders and others would like Congress to switch to this chained CPI-U for Social Security benefits, which would effectively reduce people’s monthly checks. And, it would further undermine the financial security of people receiving Social Security.
Others, including Social Security Works, want to expand Social Security. They argue that we need a better CPI-E, with a sample size that fairly represents all older adults. This CPI-E would best reflect the cost of living for older adults. It would give greater weight to health care cost increases since older adults use three times more health care than the rest of the population. And, older adults represent more than 60 percent of the people receiving Social Security benefits.
Here’s more from Just Care:
- What will your Social Security benefits be when you retire?
- When to claim Social Security benefits
- Five ways Congress could weaken Social Security
- Four ways Congress could weaken Medicare
- Large Medicare premium increase projected in 2017
- Four key differences between traditional Medicare and a Medicare Advantage plan