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Ask the Advisor Background Report: How Revisions to the CPI Can Spell Lower COLAs The 3.5% Cost-of-Living Adjustment (COLA) that retirees received in January 2001 is the highest since December of 1991, but while annual COLAs have remained low over the past 10 years, many senior costs, such as prescription drugs and health insurance premiums have soared. Why the big discrepancy? One reason has to do with changes in the way in which the Consumer Price Index (CPI) is calculated. In 1995, when the federal budget was awash in deficits, Congress began an examination of whether the CPI overstates inflation. It was argued that if the CPI was trimmed by half a percentage point in growth, the federal budget deficit would be reduced about $122 billion over 7 years. Not all economists agreed that the CPI overstated inflation, and contentiousness over the issue led to the appointment of a commission. The commission findings, that the CPI overstated inflation by 1.1% annually, came as little surprise since almost all members of the commission were on the record as believing that the CPI over-stated inflation. The head of the Bureau of Labor Statistics (BLS) Commissioner Katharine Abraham, disputed the 1996 findings, but by 1997 Congress and President Clinton considered legislating an adjustment that would cut the CPI. Lawmakers escaped the fall-out of such a political hot potato by tossing the CPI problem back to the BLS. The final 1997 Balanced Budget Act was based on assumptions of revisions to the CPI either currently underway or to be made by the BLS. By 1998 the BLS announced a substantially stepped- up schedule of revisions, virtually all of which tend to reduce the rate of inflation and COLAs. The changes, according to economist Edward McKelvey, `have created an impression of a steeper fall in inflation than would have been recorded otherwise.` TREA Senior Citizens League (TSCL) has been able to verify changes over the period from 1992 to 2000 resulting in a CPI that is growing about 0.8% more slowly than prior to 1992. How does that spell lower COLAs? A recent study for The Senior Citizens League (TSCL) found that over a ten year period, a retiree with an average benefit of $816 in 2000 would receive about $5,186 less in benefits over the period as a result of a COLA that grows 0.8% more slowly. TSCL opposes the current government schedule of CPI revisions. Sources: `Future Schedule for Expenditure Weight Updates in the Consumer Price Index,` Bureau of Labor Statistics, December 18, 1998. `Drop in Inflation isn`t as Large as it Seems,` Alejandro Bodipo-Memba, The Wall Street Journal, May 11, 1999. `Consumer Price Index: Update of Boskin Commission`s Estimate of Bias,` GAO/GGD-00-50, February, 2000. `The Distributional Implications of Reductions In Social Security COLAs,` Richard Johnson, Urban Institute, Number 5 in Series, `The Retirement Project,` 2000. For a related story, see `Seniors Receive 3.5% COLA,` The Social Security & Medicare Advisor, Dec./Jan. `01, V6#2. This article first appeared in Volume 6, Issue 5 of "The Social Security and Medicare Advisor" newsletter (April/2001). To receive future editions of "The Advisor" in its special, free e-mail version, please click here. | ||||||||
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