Record Low COLA for 2003

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Record Low COLA for 2003

Earlier this year, Social Security trustees estimated that the Cost-of-Living Adjustment (COLA) payable in January of 2003 would be just 1.3%. In only two other years have COLAs been this low—1987 and 1999. Based on Bureau of Labor Statistics (BLS) data, however, it now appears very likely to “The Advisor” that the COLA payable in January 2003 will be less than 1.1%. If so, this would be the lowest COLA ever paid. (There was one time, the first six months in 1983, when the federal government suspended COLA payments altogether due to a government deficit and a Social Security funding crisis.)

Why will the COLA be so low when health care costs are so high?
There are two reasons:

COLAs are based on the cost of living experienced by younger workers, not seniors. COLAs are calculated as a percentage of the change in the Consumer Price Index (CPI) increase. The CPI measures the change in a specific market basket of goods and services over a period of time. The CPI that the government uses to calculate your COLA, however, surveys the market basket of younger urban workers, not seniors. Younger workers tend to have employer provided insurance, use less health care services, and require fewer prescription drugs than seniors do.

Since 1983, however, the government has maintained an unpublished seniors-only CPI, the Consumer Price Index for Elderly Consumers (CPI-E) but does not use it to calculate senior COLAs. Because the CPI-E gives greater weight or significance to health care costs, it tends to more accurately reflect senior costs. In our studies of the CPI-E, a person who retired in 1984 with an average monthly benefit of $460 (for example) would have received about $6,321 more in benefits over the years using the CPI-E to calculate the COLA.

The Bureau of Labor Statistics (BLS) has implemented an aggressive series of “revisions” to the CPI that make inflation appear to be growing more slowly. In recent years, an increasing number of policymakers have claimed that COLAs may be growing faster than inflation. Some economists say the CPI exaggerates the rate of inflation. While the government has revised the CPI several times in the past, the revisions have been more significant and more frequent since 1995. In January, the government announced the latest in their series of revisions which we reported in the April, 2002, issue of this newsletter. The cumulative effect of these changes is estimated to make the CPI grow about 0.8 percentage point more slowly than it would have prior to the changes. This may not sound like a lot, but read on!

Bottom line: Your COLA gets cut!
In studying the cumulative effect of these changes over time, we found that a person who receives an average benefit of $874 in 2002 would effectively have their benefit cut by $5,356 over a ten year period assuming a 0.8 percentage point reduction to the CPI. By 2012, that person’s benefits would be cut annually by an estimated $1,068 or $89 per month.

Sources: 2002 Social Security Trustees Report, March 26,2002. “Lists of Social Security Hikes,” "The Associated Press," October 18, 2000. “Future Schedule for Expenditure Weight Updates in the Consumer Price Index,” Bureau of Labor Statistics, October 16, 2001.

For a related story see “Social Security Trustees Predict Lower COLAs, More Taxation of Benefits,” at http://www.tscl.org/NewContent/101517.asp.

Sign our online Petition to Congress for a Fair Annual Social Security COLA at http://action.tscl.org/FairAnnualSSCola.asp.

October 2002