New CPI Would Cut COLAs Significantly

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New CPI Would Cut COLAs Significantly

A new Consumer Price Index (CPI) shows inflation growing far more slowly than under the currently used CPI. Released amidst the sharpest one-month increase in medical care prices in nine years, the new “Chained Consumer Price Index for Urban Consumers” (C-CPI-U) was an 0.8 percentage point lower than the currently used CPI. The economists at the Bureau of Labor Statistics (BLS) had estimated that the C-CPI-U would likely be only 0.1 to 0.2 percentage point lower than the current CPI, based on early simulations.

Although the C-CPI-U will not be used to calculate Cost-of-Living Adjustments (COLAs) for now, the implications for Social Security and other COLA recipients are enormous. A lower CPI would mean lower COLAs.

A new study by “Advisor” editor Mary Johnson found that, should the C-CPI-U be adopted for use to calculate COLAs, a person who received an “average” benefit of $874 in 2002 would effectively have his or her COLA cut by about $11,145 over the next 10 years. By 2012, that individual’s benefit would be cut by as much as $185 per month, or about $2,225 per year, and that reduction would grow even greater every year.

The 0.08 percentage point data is based on the year 2000. Those data are final and no longer subject to revision. C-CPI-U data for 2001 and 2002 are based solely upon estimates.

Sources: Consumer Price Index: July 2002, Bureau of Labor Statistics, August 16, 2002. “U.S. July Consumer Prices +0.1%; Consensus +0.2%,” Joseph Rebello and Phil McCarty, Dow Jones Newswires, August 16, 2002. “Toward a More Accurate Measure of the Cost of Living,” final report of the Advisor Commission to Study the Consumer Price Index, December 4, 1996.

For more on this, see “CPI ‘Improvements’—A COLA Cut Cover Up?” at http://tscl.org/NewContent/101619.asp.

November 2002