Legislation Would Provide More Fair COLA

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Legislation Would Provide More Fair COLA

Seniors would receive higher Cost-of-Living Adjustments (COLAs) under legislation recently introduced by Representative Bernie Sanders (I-VT) and Bob New (R-OH). “The Consumer Price Index for Elderly Consumers Act,” H.R. 2262, would establish the Consumer Price Index for the Elderly (CPI-E) to compute the annual Social Security COLA.

Currently, Social Security recipients struggle to cope with costs that are rising far faster than benefits. The COLA that adjusts Social Security benefits is tied to a CPI that doesn’t take into account that seniors must spend a greater share of their incomes upon health care costs.

COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W surveys the change in prices of goods and services used by younger working Americans. It grows more slowly than seniors’ costs, in part, because younger workers do not spend as much on health services or use as many prescription drugs. According to the Bureau of Labor Statistics, the general public spends about 4.8% of household income on health care costs, while older persons spend more than twice as much—10.5%. Meanwhile, health care costs have been increasing two and three times the rate of general inflation.

Consequently, over the nearly 20 years for which the government has data, the CPI-E has risen about 29% more rapidly than the CPI-W. Had seniors received a COLA based on the CPI-E in January, their annual raise would have been 1.8% instead of 1.4%. While that doesn’t sound like much, the difference compounds over time. According to an on-going study by Advisor editor Mary Johnson, beneficiaries who retired with an average benefit of $460 in 1984 receive about $808 today. Had their COLA been indexed using the CPI-E, however, they would receive about $60 per month more in benefits.

Sources: The Bureau of Labor Statistics, May 10, 2003. “2002 CPI-E Study,” Mary Johnson, October 21, 2002.

September 2003