by Max Richtman
Whenever I do a town hall about Social Security, one issue invariably rises to the top: cost-of-living adjustments (or COLAs).
Retirees across America consistently tell us that their annual COLAs simply are not adequate. And they have a reason to be concerned. Though the 2019 COLA is a decent 2.8%, these adjustments historically have not kept pace with seniors’ rising expenses. In fact, for three of the past 10 years there were no cost-of-living increases — zero. In 2017, the COLA was a scant 0.3% — or a meager $4 a month for the average beneficiary.
Simply put, retirees need a COLA that accurately reflects the effects of inflation on their cost of living. The current index, the CPI-W, is pegged to urban wage earners’ living expenses, and tends to underestimate what seniors spend on big ticket items like housing and medical care. By the same token, retirees purchase less gasoline than working-age Americans, even though the cost of gas figures prominently into the current inflation index. As the Center for Retirement Security explains, “In 2016, retirees received no COLA specifically because the cost of oil plummeted. The low cost of gasoline offset [actual inflation] in other areas.”
Fortunately, a better formula exists. It’s called the Consumer Price Index for the Elderly — or CPI-E — based on a ‘basket’ of goods and services that reflects older Americans’ spending patterns. The CPI-E just got a big boost from Congressman John Larson (D-Conn.), who included it in his bill to expand retirement benefits, The Social Security 2100 Act. “Seniors have been seeing rises in food…housing, and medical costs, without always receiving adequate increases in the COLA. We must do better and work toward a comprehensive solution,” Congressman Larson said.
A more generous COLA formula is crucial to keeping millions of seniors from slipping into poverty. Fully 40% of America’s seniors depend on Social Security for virtually all their income. The average monthly retirement benefit is a modest $1,461, or $17,500 a year. Longer life expectancy means many retirees must spread their modest financial resources over a longer period of time. Social Security is there to provide a basic income for as long as beneficiaries live. Providing adequate cost-of-living adjustments is essential to maintaining their long-term financial security.
Unfortunately, Congressional conservatives are moving in the opposite direction: proposing benefit cuts and a cost-of-living formula known as the Chained CPI, which would be more meager than what we have today. By substituting cheaper items in that basket of goods and services, the Chained CPI underestimates inflation and would result in even lower COLAs. The same GAO report which indicated seniors would be better off with a CPI-E found that the retirement income of America’s lowest-earning households would drop by roughly 6% over 30 years under a Chained CPI.
Republicans wove the Chained CPI into their 2017 tax bill to change the way income brackets are indexed. Seniors advocates rightly worry that this codification of the Chained CPI could ultimately result in its use for calculating cost-of-living increases for Social Security. Poll after poll demonstrates that the public supports the exact opposite approach. In an online survey by the National Academy of Social Insurance, 64% of respondents favored an increased COLA “to more fully protect seniors against inflation.” In fact, majority support for a COLA boost cut across income groups, age brackets, and party affiliations.
Skeptics may say that the nation cannot afford a more generous COLA formula, but it simply isn’t true. Congressman Larson pays for the adoption of the CPI-E — along with a modest, across the board benefit boost — by adjusting the Social Security payroll tax wage cap so that the wealthy pay their fair share. (Coincidentally, Feb. 18 marked the time of year when millionaires stop paying into Social Security while the rest of us continue to contribute through December.) The bill also gradually increases the FICA tax by 1.2% over the next two decades. The average worker would pay 50 cents more a week in exchange for higher retirement benefits.
As Congressman Larson suggests, the CPI-E must be seen as part of a comprehensive strategy to boost benefits while putting Social Security on a sound financial footing. His bill provides enhanced financial security for retirees and keeps the system solvent for the remainder of this century. By incorporating a more accurate cost-of-living index, the legislation offers seniors superior protection against the insidious effects of inflation for the rest of their lives.
Max Richtman is president and chief executive of the National Committee to Preserve Social Security and Medicare, a nonprofit organization that promotes the financial security, health and well-being of maturing Americans. He is former staff director of the U.S. Senate Special Committee on Aging.