Why We Need The CPI-E

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Why We Need The CPI-E

By Advisor Editor, Mary Johnson
Social Security and benefits of other government retirement programs rose 2.7% in January. While seniors depend on the annual Cost-of-Living Adjustment (COLA) to keep up with rising costs, in recent years COLAs have fallen far short of doing so. Rising health care and energy costs are taking a bigger and bigger chunk out of seniors’ pockets.

The COLA is tied to changes in the Consumer Price Index (CPI). While the public commonly thinks of the CPI as one index — this is not the case. There are several CPIs — each of which measures inflation rising at different rates — depending on whose “market basket” the government is looking at.

The government calculates COLAs using one of the most slowly growing indexes — the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It surveys the goods and services that younger workers use. Younger workers have far different spending habits than seniors, who must spend a much greater percentage of their income on health care. Thus, the CPI-W does not accurately measure the increase in senior costs — and TSCL believes that seniors are receiving less than they should.

The government does track senior costs however, and has done so since 1983 — maintaining the Consumer Price Index for Elderly Consumers (CPI-E). Legislation established the CPI-E precisely because of the concern that other CPIs measure changes in the economy as a whole and understate costs for older people.

Because the CPI-E gives greater weight to the portion of income seniors must spend on health care, it grows more quickly than the CPI-W. Seniors would have received a COLA increase of 3.1% this year instead of 2.7% if the government had used the CPI-E to calculate COLAs.

Underpayments of COLAs accumulate over a retirement. For example, a senior who retired with an average benefit of $460 in 1984 would have received about $8,629 more in the past 21 years had the government used the CPI-E to calculate their COLA. Today that senior would receive a benefit that’s about $69 per month higher — $916 instead of the $847 actually received — enough to cover most of the monthly Medicare Part B premium.

TSCL supports legislation that would provide a more fair COLA by using the CPI-E to calculate the annual increase and is working to get legislation introduced in the Senate as well as the House. Although a House bill introduced by Representative Bernie Sanders (VT) has received widespread support in the past, Federal Reserve Chairman Alan Greenspan is pressing Congress to adopt the most slowly growing CPI, the “chained CPI” to calculate annual COLAs. TSCL is urging seniors to tell Congress “Don’t Chain Our COLAs!” In order to afford rising health care services, seniors need a COLA that measures their costs more accurately and as the law intended.

Sources: CPI-E data, Bureau of Labor Statistics, October 26, 2004. CPI-E Study, Retiree With Average Benefit of $460 in 1984, Mary Johnson, October 26, 2004.

January 2005