New Round of CPI Changes Would Cut COLAs

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New Round of CPI Changes Would Cut COLAs

Alexandria, VA (March 4, 2002)--Another round of changes to the Consumer Price Index (CPI) will cut future Cost-of-Living Adjustments (COLAs) and reduce billions in other government benefits, warns a national senior organization. "Most Americans probably think that the government simply tracks the changes in price of a fixed market basket of goods from one period to the next," says George Smith, Chairman of TREA Senior Citizens League (TSCL). "Instead, the CPI increasingly attempts to measure subtle variables affected by human judgement," (1) Smith explains. This policy he says, "has led not only to reducing the rate of growth in the CPI, but also effectively cutting COLAs." According to a recent study for TSCL, a Social Security recipient getting $874 per month in 2002 would effectively see his or her benefit cut by $5,356 over the next 10 years as the result of CPI changes since 1995.(2)

Starting this year, the government will begin to track the substitutions consumers make in response to price increases.(3) That change is expected to further slow the growth of the CPI. Although the new "superlative" CPI will be reported separately for now, a recent report by the National Academy of Sciences recommended that it would be appropriate for the calculation of Social Security and other government COLAs.(4)

"Tracking substitutions is fine for when consumers opt to buy instant coffee instead of ground, but seniors cannot readily substitute a less costly surgery or opt for a different medical treatment," observes Smith. "A major problem with the CPI" says Smith, "is the fact that the index used to determine COLAs is based on the inflation experienced by younger working Americans and specifically excludes the senior market basket. Younger workers are more likely to have employer provided insurance, and to require less health care services and prescription drugs-this tends to understate costs for seniors," he explains.

"Seniors would receive a more accurate COLA," says Smith, "if it were determined by a 'seniors only' CPI, the Consumer Price Index for Elderly Consumers (CPI-E). TSCL supports legislation that would tie the annual Social Security increase to the CPI-E, "The Consumer Price Index for Elderly Consumers Act" (H.R. 2035), introduced by Representative Bernie Sanders (I-VT) in 2001. "Seniors should communicate with their Members of Congress to explain how important it is for COLAs to keep pace with rising health care costs. Ask your Member of Congress to co-sponsor this legislation, which would provide a more fair COLA-one that more accurately reflects the true costs for seniors," he urges.

TSCL is a national group of politically active seniors concerned about the protection of their earned Social Security, Medicare, military, and other retirement benefits. TSCL members participate in a number of grassroots lobbying and public education campaigns to ensure governmental bodies, including the Social Security Administration and the Centers for Medicaid and Medicare Services, live up to their commitments. For more free information on this issue and our organization, please contact us and ask for Department W20301, or visit our website www.tscl.org.

(1)"An Economic Speedometer Gets An Overhaul," Julie Solomon, The New York Times, December 23, 2001.
(2) "COLA Study: Impact of 0.8% Change-Person Receiving Average Benefit of $874 in 2002," Mary Johnson for TSCL, January 15, 2001.
(3)"New Research Says US CPI Improving But Needs Work," Jonathan Nicholson, Reuters, December 27, 2001.
(4)"At What Price?: Conceptualizing and Measuring Cost-Of-Living and Price Indexes (2001)," National Academy of Sciences, December 2001.

March 2002