Social Security’s cost-of-living adjustments spark debate about the appropriate measurement used

Personal Finance

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Social Security beneficiaries are receiving the highest cost-of-living adjustment in decades, thanks to rising inflation.

That 5.9% increase went into effect in January.

Prices have continued to climb higher since that change was announced in October.

The Consumer Price Index, a government measure for price changes for certain goods, climbed 7% in December from the previous year — the fastest increase since 1982, according to data released Wednesday.

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Excluding food and energy prices, the index was up 5.5% from the previous year.

Record-high inflation comes as policymakers and experts are debating whether Social Security’s annual cost-of-living adjustment, or COLA, accurately reflects the price increases seniors face.

The Social Security Administration uses a specific measurement, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, to calculate those annual adjustments.

New Social Security reform legislation proposed on Capitol Hill seeks to change that measurement to an experimental index for people ages 62 and over known as the Consumer Price Index for the Elderly, or CPI-E.

President Joe Biden advocated for this change, along with other Social Security reforms, during his campaign.

Social Security and senior advocacy groups have also called for changing over to the CPI-E, which was created in 1987 by the U.S. Bureau of Labor Statistics at Congress’ instruction.

The switch would not represent a benefit increase, noted Nancy Altman, president of advocacy group Social Security Works, in written testimony submitted for a December hearing on the proposed legislation.

“It simply ensures that benefits will not erode, but will maintain their purchasing power over time,” Altman wrote.

Switching to CPI-E might not be much help

But changing to the CPI-E may not necessarily increase the COLAs beneficiaries see, according to the Center for Retirement Research at Boston College.

Had that measure been used for this year’s COLA, the increase would have been just 4.8%, rather than the 5.9% hike that has been implemented, the Center for Retirement Research found.

Moreover, while the CPI-E has historically risen faster than the CPI-W, that difference has narrowed.

From the third quarter of 1983 to the third quarter of 2021, the average annual increase to the CPI-E was 2.8% versus 2.6% for the CPI-W.

If we were setting up a perfect world, then it might be worthwhile having a separate CPI for older people or people who are receiving Social Security benefits.
Alicia Munnell
director of the Retirement Research Center

However, from 1983 to 2002, the CPI-E rose about 0.38 percentage points per year faster than the CPI-W. But in the past 20 years, from 2002 to 2021, that gap fell to 0.05 percentage points.

Much of that decline can be explained by changing medical and transportation costs, according to the Center for Retirement Research.

From 1983 to 2002, medical care costs rose 2.6% faster compared to overall prices, while transportation rose 0.8% slower. But from 2002 to 2021, medical care costs were just 1.3% more than the CPI-W average, while transportation rose to 0.2% more.

The slowdown in cost growth, particularly with regard to medical care, reduced the inflation seniors faced.

The ability to pay for health-care needs is one of the most critical issues of retirement.
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It also is the reason why the CPI-E was less than the CPI-W last year, according to the Center for Retirement Research, when the growth of medical care prices was just 0.4%.

To best measure the changing costs Social Security beneficiaries face, it may make more sense to use a different measure than the CPI-E, which just reweights data collected for the population as a whole, the research concluded.

“If we were setting up a perfect world, then it might be worthwhile having a separate CPI for older people or people who are receiving Social Security benefits, than for the rest of the population, because their spending patterns do differ somewhat,” said Alicia Munnell, director of the Retirement Research Center.

However, that change should not be a first priority, Munnell said, as more urgent fixes are needed to improve Social Security’s solvency. If nothing is done by 2034, just 78% of benefits will be payable, according to the latest estimates.

Beneficiaries who are worried about rising prices now can take comfort in the fact that that will be factored into next year’s COLA, Munnell said.

But there is no guarantee the annual increase in 2023 will be as high. If inflation declines, the adjustment, as measured by the CPI-W, may be lower.

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