The BLS estimates that the annual inflation rate tracked by this new index will be 0.1 to 0.2 percentage points lower.  Although the plan is to keep the "Superlative" CPI separate for now, a recent report by the National Academy of Sciences recommended its use for calculating COLAs.  Because the rate of inflation would grow more slowly under the "Superlative" CPI, this would effectively cut senior COLAs for some 80 million recipients of government benefits.

A massive Social Security reform bill that includes a provision to tie senior COLAs to the "Superlative" CPI was introduced last year and is currently pending in the House.  In addition to indexing the "Superlative" CPI, the bill would further cut increases by an additional 0.33 percentage point. The bill would make this change effective almost immediately.

TSCL believes the "Superlative" CPI is inappropriate for COLAs.  Instead of tracking the increase in price in a fixed market basket of goods and services, the "Superlative" CPI attempts to track a much more difficult-to-measure intangible -- human substitution behavior.  Seniors do not always have the option of substituting, as when no generic drug exists, nor for example can they readily substitute a less expensive form of surgery for another. In addition, final "Superlative" CPI data would only be available after a two-year lag time. Making timely determination of COLAs would necessitate estimates -- in other words, guesswork.

Earlier this year, the BLS released the latest in a series of changes to the conventional CPI.  Including earlier changes the BLS has made since 1995, this has the cumulative effect of reducing the rate of inflation by about 0.8 percentage point.  This effectively cuts senior COLAs by the same amount. 

A study performed earlier this year by "Advisor" editor Mary Johnson concludes that seniors with a monthly benefit of $874 this year would have their COLA effectively cut by about $5,356 over ten years if the conventional CPI is used. By the end of the ten-year period, that person's benefit would be cut by about $89 per month and $1,068 per year. 

Sources: "Consumer Price Index: January 2002," Bureau of Labor Statistics, February 20, 2002. "U.S. to Reveal Details of New Chained CPI Friday," Jonathan Nicholson, Reuters, February 21, 2002. "At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes," National Academy of Sciences, December 2001.

For more details, click here to read "COLAs Cut by CPI Changes" from our April 2002 issue: http://www.tscl.org/NewContent/101406.asp

April 2002