COLAs Cut by CPI Changes

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COLAs Cut by CPI Changes

Cost-of-Living Adjustments (COLAs) are likely to be very low in 2003. Not only is the inflation rate dropping, the government is also making changes to how it calculates the Consumer Price Index (CPI). These changes tend to make the CPI grow even more slowly than if calculated using pre-1995 methods. Because the CPI is used to calculate COLAs, Social Security checks have been effectively cut by the changes. According to new studies by Advisor editor, Mary Johnson, a Social Security recipient getting $874 per month in 2002 would effectively see his or her benefit cut by an estimated $5,356 over the next 10 years because of the new methodology (see chart in article "How Big A COLA Cut?" http://www.tscl.org/NewContent/101407.asp).

In January, the Bureau of Labor Statistics (BLS) announced the most recent change and more changes are on the way. Some economists say the changes are necessary to improve the accuracy of the CPI, which they claim overstates the rate of inflation. They contend that the CPI does not fully take into account when quality improves or how consumers substitute a less expensive product when another has gone up in price.

The CPI came under increased scrutiny in the balanced budget debates of the '90s because it's used to determine the size of COLAs for Social Security and military retirees, and payments for other government programs as well-about 80 million people in all.

A 1996 report by the Boskin Commission estimated that the CPI overstates the annual COLAs by about 1.1% per year and recommended changes. By 1998, in response to changes already made or planned to the CPI, the Congressional Budget Office (CBO) lowered their estimates of the rate of growth in CPI. The CBO also increased estimates of the Social Security surplus in part because of the estimated savings from lower benefit payments.

Improving the accuracy of the CPI does not mean better tracking of senior costs, however. To the contrary, the COLA is currently determined by a CPI that surveys the goods and services purchased by younger workers and specifically excludes the senior "market basket." But unlike younger workers, seniors must spend about 21% to 51% of their incomes upon health care costs and prescription drugs. Those items rose by a staggering 18% in 2001, yet seniors received only a 2.6% COLA.

TSCL believes seniors would receive a more fair COLA, if the annual adjustment were tied to a CPI that more accurately surveyed senior costs, such as the Consumer Price Index for Elderly Consumers (CPI-E). Legislation to tie the annual Social Security increase to the CPI-E, "The Consumer Price Index for Elderly Consumers Act" (H.R. 2035) was introduced in the House by Representative Bernie Sanders (I-VT) in 2001. You can petition your Congressional representative to support H.R. 2035 by signing our online petition.

Sources: "An Economic Speedometer Gets an Overhaul," Jolie Solomon, The New York Times, December 23, 2001. "At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes (2001), study by the National Academy of Sciences. "The Economic and Budget Outlook For Fiscal Years 1999-2008," The Congressional Budget Office, July 15, 1998.

For more on this, read TSCL's issue brief, "A More Accurate COLA?" at http://www.tscl.org/NewContent/101392.asp.

March 2002