FAQs About the CPI and COLAs

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FAQs About the CPI and COLAs

What is the Cost-of-Living Adjustment or COLA?

What is the Consumer Price Index or CPI?

What is included in the Consumer Price Index market basket?

Does the government survey a senior market basket?

Why was the Consumer Price Index for the Elderly (CPI-E) started in 1983?

What has the data revealed since 1983? Is the senior market basket going up more quickly than that of other consumers?

What does that mean in terms of money?

What about younger retirees? What's the effect on them?

Is the government doing anything to make the Consumer Price Index more accurate for seniors?

I understand that legislation has been introduced that would provide a more fair Cost-of-Living Adjustment. What is "The Consumer Price Index for Elderly Consumers Act"?

What should seniors do to support "The Consumer Price Index for Elderly Consumers Act"?

What is the Cost-of-Living Adjustment or COLA?

Cost-of-Living Adjustments, or COLAs, are an annual increase for recipients of Social Security, military, and other government benefits. An estimated 80 million people receive benefits that are affected by COLAs. COLAs are supposed to help maintain the purchasing power of benefits as consumer prices increase. COLAs have been automatically determined by increases in the Consumer Price Index (CPI) since 1972. Prior to that it took special legislation from Congress to increase Social Security benefits.

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What is the Consumer Price Index or CPI?

The Consumer Price Index, or CPI, is a tool that measures the average change of prices in consumer goods and services over a period of time. It measures changes in a "market basket," in different areas of the country and among various consumer groups. The U.S. Bureau of Labor Statistics maintains several CPIs reflecting different consumer groups. The CPI to which Cost-of-Living Adjustments (COLAs) are tied is the Consumer Price Index for Urban Wage Earners and Clerical Workers known as the CPI-W. Senior advocates are concerned that using the CPI-W to determine COLAs does not accurately reflect the inflation that seniors experience. The CPI-W surveys only the costs experienced by younger workers who generally do not have to spend as much on health care and prescription drugs as seniors do.

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What is included in the Consumer Price Index market basket?

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is limited to the spending patterns of younger working consumers and represents less than one-third of the total U.S population. Although used to determine Cost-of-Living Adjustments (COLAs), it specifically EXCLUDES the spending experience of anyone whose primary source of income is from retirement pensions. Currently the CPI-W market basket contains such things as rent, some medical costs, food, gas and oil among other items. It also includes high tech consumer items such as computers, big screen televisions, cell phones, DVD players that tend to rapidly decrease in price as the technology improves. Seniors however, do not purchase high tech items as often as younger working consumers. Instead, older Americans spend a greater share of their incomes on items that are more rapidly increasing in price-like prescription drugs and health care. Thus senior advocates say the CPI-W tends to understate senior costs resulting in COLAs that are not keeping pace with senior costs.

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Does the government survey a senior market basket?

Surprisingly, yes. The government has surveyed the senior market basket for more than 18 years-starting in 1983. The government maintains an experimental unpublished "seniors only" Consumer Price Index (CPI) that surveys the market basket of persons over the age of 62. It's called the Consumer Price Index for the Elderly, or CPI-E. Among other things it gives greater importance or "weight" to the health care component, reflecting the greater share of income that seniors must spend on health care.

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Why was the Consumer Price Index for the Elderly (CPI-E) started in 1983?

In 1981 Social Security was in crisis. The Social Security Trust Fund was so broke, that the government had to transfer money out of the Medicare Trust Fund in order to pay Social Security benefits, because the rest of the federal budget was also in deficit. Congress had already cut benefits and enacted one of the largest payroll tax hikes in history aimed at keeping the system solvent just a few years earlier in 1977. But inflation skyrocketed-growing from 5.9% to 14.3% continuing to erode the Trust Fund. The Reagan Administration proposed more benefit cuts including a reduction in benefits for early retirement at age 62, an altered benefit formula for future retirees, and a 3-month delay in Cost-of-Living Adjustments (COLA). As you could imagine, this set off an uproar in Congress where members of both parties were besieged by calls from angry constituents fearing cuts to their benefits. The Consumer Price Index for the Elderly (CPI-E) was established in the amendments to The Older Americans Act shortly after that.

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What has the data revealed since 1983? Is the senior market basket going up more quickly than that of other consumers?

Yes. A number of studies have compared the Consumer Price Index for the Elderly (CPI-E) with The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). TREA Senior Citizens League has monitored the CPI-E for several years. According to data from the Bureau of Labor Statistics over the 18-year period for which data is available, the CPI-E has grown about 15.31% more quickly than the CPI-W. For example seniors received a Cost-of-Living Adjustments (COLA) of 2.6% on January 1 of 2002. Had they received a COLA based on the CPI-E it would have been 3%.

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What does that mean in terms of money?

A study performed for TREA Senior Citizens League (TSCL) compared what a person who retired at age 65 in 1984 with an average benefit would have received using The Consumer Price Index for the Elderly (CPI-E), versus what they actually received using The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). While it may only mean a few dollars in the first years, the difference can be quite significant over time because of the compounding effects. The study found that this particular retiree would have received about $6,321 more over the period using the CPI-E. By 2002, this person (who would be 83 this year) would have received a benefit that is about $55 per month higher or about $667 more in benefits this year. $667 would help a lot when purchasing prescription drugs that Medicare does not currently cover.

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What about younger retirees? What's the effect on them?

Another study for TREA Senior Citizens League (TSCL) looked at a person who retired in 1996 with an average benefit of about $745 per month. In 2002, that person receives about $862 per month. If their benefit were increased using The Consumer Price Index for the Elderly (CPI-E), they would be getting $875 instead. That's a difference of more than $156 this year. Remember, the problem not only affects retirees, but also widows, the disabled, people on SSI, and military retirees.

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Is the government doing anything to make the Consumer Price Index more accurate for seniors?

The government has been hard at work making changes to the Consumer Price Index (CPI)-changes they say make the index more accurate. But keep in mind accuracy in this case depends on whose market basket the government is looking at-and right now that's younger workers'. The debate over the accuracy of the CPI and Cost-of-Living Adjustments (COLAs) achieved prominence in the mid-1990s under increasing pressure to balance the budget. Since that time some in the government have claimed that the CPI overstates inflation and therefore the government is overpaying Social Security benefits. In 1996, a Commission led by economist Michael Boskin found that the CPI had an upward bias of about 1.1% and recommended a number of changes that would reduce the rate of growth in the CPI. Following the release of that report many of those changes were quietly adopted leading the Congressional Budget Office to revise estimates of inflation downward by 0.7 percentage point.

The rate of growth in the CPI has enormous impact on the federal budget. It is not only used to determine COLAs, but individual income tax brackets and personal exemptions are also adjusted for inflation using the CPI. The Bureau of Labor Statistics estimated in 1996 that each 1 percent growth in the index produced a $5.7 billion increase in outlays and a $2.5 billion decline in revenues." So by reducing the rate of growth in the CPI, the government significantly increased the federal surplus we enjoyed in recent years.

In March, the trustees of the Social Security Trust Fund released the 2002 Annual Report. They revised their estimates of future COLAs downward citing future changes to the CPI. The Trustees estimate that the COLA for 2003 will be only 1.3%. This would make it the lowest COLA ever paid. Senior health care costs however are expected to grow around 19% this year.

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I understand that legislation has been introduced that would provide a more fair Cost-of-Living Adjustment. What is "The Consumer Price Index for Elderly Consumers Act"?

The Consumer Price Index for Elderly Consumers Act was introduced by Rep. Bernard Sanders (I-VT) in May of 2001. The bill is in the House Ways and Means Committee, the House Energy and Commerce Committee, and the House Committee on Education and the Workforce. The bill, if passed and signed into law in its current form, would use the Consumer Price Index for the Elderly (CPI-E) to determine the Cost-of-Living Adjustment instead of The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

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What should seniors do to support "The Consumer Price Index for Elderly Consumers Act"?

Seniors should communicate with their Member of the House and especially their Senators to tell them how much they depend on their Cost-of-Living Adjustments (COLAs) to help them keep up with rising costs. TREA Senior Citizens League is working to get this legislation introduced in the Senate. In communicating with your Members of Congress, ask them to co-sponsor H.R. 2035, The Consumer Price Index for Elderly Consumers Act.

Also, to further help this cause, sign our Petition toCongress for a Fair Annual Social Security COLA.

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July 2002