Why the Social Security COLA matters

2017-07-10T16:06:20+00:00June 28th, 2016|Aging Issues, Retirement, Social Security|

There’s no more closely watched Washington announcement for seniors than word of what the next year’s Cost of Living Adjustment will be for Social Security beneficiaries.  While the final decision isn’t announced until October of each year, the annual Social Security Trustees Report usually provides a sneak peak a few months early, as it did last week.

News that seniors should prepare for no increase (or a very small increase) for the second year in a row and the fourth time since 2010 has many understandably worried.  Contrary to conservative /fiscal hawk mythology, which dominates so much of the political discourse in Washington these days, American Social Security beneficiaries aren’t living high on the hog.  In fact, Americans know first-hand that the average $1,300 monthly Social Security retirement benefit isn’t too generous.  They know that this year’s zero cost of living allowance isn’t too generous.  They see a growing amount of their Social Security check going to pay for rising healthcare costs and skyrocketing drug prices.  It’s no wonder the annual COLA announcement adds to their frustration. 

But here’s the thing…Congress didn’t vote or even “decide” to give you a tiny or zero COLA next year.  That number is cooked into the law.  The only way to change the COLA is to convince your Members of Congress to support a new formula that actually measures the cost of living American seniors face.  

This is how current law works: 

“If there is an increase in inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was made to the third quarter of the current year. “ …NCPSSM, “Call for COLA Recalculation,” June 2015 

That means the Social Security COLA is based on the costs of goods and services purchased by wage earners, not retirees.  That’s a real problem since the purchases made by retirees are vastly different than younger Americans still in the workforce. 

“The primary source of the difference in spending patterns is medical expenses, which for most years have increased at a higher rate of inflation.  Seniors spend three times more than younger consumers on health care, including prescription drugs, medical co-pays and deductibles and non-covered expenses.  In fact, older Americans spend 23 percent of their average Social Security check for Parts B and D cost-sharing in addition to paying for health services not covered by Medicare. The following chart illustrates a sample of the increases in health care expenses compared to the increases in Social Security benefits:”

 

 

This is why we have long advocated for the adoption of a cost of living formula for the elderly that measures the expenses retirees actually face.

As early as the 1980’s, Congress recognized the problems with using the CPI-W as the basis for preserving the spending power of Social Security benefits, and in 1987 directed the Bureau of Labor Statistics (BLS) to begin work on an index focused on the elderly.  As a result, the BLS created the Experimental CPI for Americans 62 Years of Age and Older (CPI-E) and calculated estimates of the index dating back to December 1982.  The CPI-E continues to be classified as experimental because its sample size is smaller than the CPI-W, and is therefore subject to a greater sampling error.

The National Committee believes a fully developed CPI-E represents the best hope for correcting problems with the CPI-W for America’s seniors.  But Congress must provide the BLS with the funding needed to finish work on the CPI-E and make it the standard for calculating COLA adjustments for Social Security, Veterans, and Federal Civilian and Military retirement benefits. 

America’s seniors worked hard for their earned benefits and they deserve to have their standard of living and purchasing power preserved through an accurate COLA calculation.