How Changes To The Consumer Price Index Affect Your COLA

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How Changes To The Consumer Price Index Affect Your COLA

Despite rapidly rising demand, high oil prices, and extremely tight labor markets, inflation has stayed exceptionally low in recent years. According to the new report from the Congressional Budget Office, the Consumer Price Index (CPI) figures "represent inflation rates that are about a percentage point lower than they were during the first few years of the current expansion."

Between 1992 to 1995, the government began a series of changes to the way the CPI is calculated. These and other ongoing changes have produced a CPI that is growing more slowly than it would have prior to the changes in methodology. Research conducted for TSCL validates that the cumulative effect of the changes is a CPI that is about 0.8% lower in 2000 than it would have been prior to the changes. What effect does the difference in methodology have on your Cost-Of-Living Adjustment (COLA)? The study indicates that the average retiree may lose over $1,400 in COLA benefits between 2000 to 2004.

Retiree With Average Benefit

Year	Average Monthly Benefit	CPI Assumption New Method	Benefit Increase	Benefit the Following Year
1999	774.95	2.4	18.60	793.54
2000	793.54	2.5	19.84	813.38
2001	813.38	2.4	19.52	832.90
2002	832.90	2.5	20.82	853.73
2003	853.73	2.5	21.34	875.07
2004	875.07	2.5	21.88	896.95
Year	Average Monthly Benefit	CPI Assumption Old Method	Benefit Increase	Benefit the Following Year
1999	779.54	3.1	24.17	803.70
2000	803.70	3.3	26.52	830.22
2001	830.22	3.2	26.57	856.79
2002	856.79	3.3	28.27	885.06
2003	885.06	3.3	29.21	914.27
2004	914.27	3.3	30.17	944.44
Year	Old Method Benefit	New Method Benefit	Monthly Difference	Annual Benefits Lost
1999	779.54	774.95	4.59	55.08
2000	803.70	793.54	10.16	121.88
2001	830.22	813.38	16.84	202.09
2002	856.79	832.90	23.89	286.64
2003	885.06	853.73	31.34	376.05
2004	914.27	875.07	39.20	470.42

5 Year Loss (total, year, month) -
$ 1,041.74, 2000-2004, $ 1,457.08

Source: "The Budget And Economic Outlook: Fiscal Years 2001-2010," Congressional Budget Office, January 26, 2000.

This article first appeared in Volume 5, Issue 6 of "The Social Security and Medicare Advisor" newsletter (May/2000). To receive future editions of "The Advisor" in its special, free e-mail version, please click here.