Social Security recipients would be outraged if they knew how the annual cost of living adjustment is calculated.  Did you know it has a direct effect on the amount of Social Security you will receive?

The first question is what are Cost-Of-Living- Adjustments or COLAs? What were they designed to do?

COLA’s are tied directly to the consumer of price index, or CPI. They were primarily designed to protect the 80 million people who receive government benefits, including those on social security, from the ravages of inflation. 
Depending on the CPI index, they can or cannot represent an increase in your Social Security check. With inflation running low in recent years, Social Security recipients have seen the buying power of their benefits continue to erode. 

Critics, and I happen to be one of them, believe that the formula used for the CPI is inaccurate when it comes to the goods and services on which retirees actually spend their money.  Presently the COLA is based on what’s known as the Consumer Price Index for Urban and Wage and Clerical Workers. Although it is based on a family of four, most retiree’s households are much smaller. The current CPI certainly doesn’t reflect the inflation that senior’s experience. Retirees pay substantially more for medical care costs, particularly for pharmaceutical products, which often are not covered by Medicare. The July issue of Older Americans Report states that over the past 15 years the prices of goods bought by seniors has gone up more quickly than those bought by the general public. Most of this difference was due to higher health care costs. 

Starting next year, even more changes to the CPI are being proposed. This will further reduce the reported inflation rate. An attempt will be made to measure how much of a switch consumers make to a less expensive product, when the original product price goes up. The rationale is that if people can find cheaper products to replace more expensive ones, they don’t need to receive additional income. Using this assumption to track seniors’ expenses won’t work. For example, a senior requiring heart surgery may not be able to substitute less costly surgery or another type of treatment.  There is also not always a generic alternative to a brand prescription drug.

A study done by the Urban League of the suggested revisions to the CPI found that the financial pain from reductions in Social Security COLAs would fall disproportionately on the poorest seniors. Currently, 10.5 percent of America’s seniors have annual incomes below the poverty level. Another 6.5 percent have incomes just above the poverty level.

The next question obviously is what can be done to have the CPI accurately reflect older Americans living expenses?  Well, believe it or not, in 1987 Congress took a positive step toward correcting the way the CPI is calculated. Responding to the criticism of senior groups, Congress amended the Older Americans Act of 1965.

The Bureau of Labor Statistics was ordered to come with an experimental CPI that would better reflect the buying the buying habits of consumers 62 years and older. A new experimental CPI was born called CPI-E that accurately shows what older adults actually spend their money. 

Now, here’s the part I find hard to believe. Congress has never officially enacted the CPI-E. There have been a number of studies comparing the cost of living adjustments in Social Security that would have occurred if the Senior CPI had been used. The figures for the Senior CPI always came a bit higher than the traditional CPI. Just think about this. For almost 18 years, if the senior CPI had been used, your social security payments could have been higher. During this time, the senior CPI has grown about 15 percent more than the present CPI. What a difference that could have made to older Americans facing the tough choices of  buying food, paying the rent, or filling a needed prescription.

I believe it’s definitely time to have COLAs figured on the actual costs paid by the people receiving the benefits. A separate COLA for people over 62 is also needed. There are several bills before Congress to make sure COLAs are more accurately figured. This is a hopeful sign.

Finally, let me say that reforming the CPI is not just a fiscal issue. It’s also an issue of fairness and justice. Many retired workers rely on their Social Security
pension for survival. Older Americans represent a distinct demographic. Their lifestyle and types of purchases are simply not identical to the four person average American family. Unlike the so-called average family, senior citizens lack the mobility and means to change buying patterns in the face of rising prices.

To learn more about the senior price index for seniors (CPI-E), I recommend this website  -  www.tscl.org/sscola.asp