January 21, 2022

Social security cost of living adjustments lead to discussion about measurements

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Social Security beneficiaries receive the highest cost of living adjustment in decades, thanks to rising inflation.

That 5.9% increase entered into force in January.

Prices have continued to rise since that change was announced in October.

The Consumer Price Index, a government measure for changes in the price of certain goods, climbed 7% in December from the previous year — the fastest increase since 1982, according to data released Wednesday.

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Excluding food and energy prices, the index was 5.5% higher than last year.

Record-high inflation comes as policymakers and experts debate whether Social Security’s annual cost-of-living adjustment, or COLA, accurately reflects the price increases seniors face.

The Social Security Administration uses a specific measure known as the Consumer Price Index for Urban Wages and Employees, or CPI-W, to calculate those annual adjustments.

New Social Security reform legislation proposed on Capitol Hill seeks to turn that measurement into an experimental index for people age 62 and older, known as the Consumer Price Index for the Elderly, or CPI-E.

President Joe Biden campaigned for this change, along with other Social Security reforms.

Social Security and leading advocacy groups have also called for a move to the CPI-E, which was established in 1987 by the U.S. Bureau of Labor Statistics on behalf of Congress.

The move wouldn’t mean an increase in benefits, noted Nancy Altman, president of the advocacy group Social Security Works. written testimony submitted for a hearing in December on the proposed legislation.

“It just ensures that the benefits don’t diminish, but maintain their purchasing power over time,” Altman wrote.

Switching to CPI-E may not help much

But moving to the CPI-E doesn’t necessarily increase COLA beneficiaries, according to Boston College’s Center for Retirement Research.

Had that measure been used for this year’s COLA, the increase would have been just 4.8%, rather than the 5.9% increase that has been implemented, the Center for Retirement Research found.

In addition, while the CPI-E has historically risen faster than the CPI-W, that gap has narrowed.

From the third quarter of 1983 to the third quarter of 2021, the average annual increase for the CPI-E was 2.8% compared to 2.6% for the CPI-W.

If we were to create a perfect world, it might be worth having a separate CPI for the elderly or those receiving Social Security benefits.

Alicia Munnell

director of the Pension Research Center

However, from 1983 to 2002, the CPI-E increased about 0.38 percentage point per year faster than the CPI-W. But over the past 20 years, from 2002 to 2021, that difference has fallen to 0.05 percentage point.

Much of that decline can be explained by changing medical and transportation costs, according to the Center for Retirement Research.

From 1983 to 2002, medical care costs grew 2.6% faster compared to total prices, while transportation costs grew 0.8% more slowly. But from 2002 to 2021, medical care costs were only 1.3% higher than the CPI-W average, while transportation rose to 0.2% more.

The slowdown in cost growth, particularly with regard to medical care, reduced inflation faced by seniors.

The ability to pay for health care needs is one of the most critical issues of retirement.

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It’s also why the CPI-E was lower than the CPI-W last year, according to the Center for Retirement Research, when medical care prices grew by just 0.4%.

To best measure the changing costs of Social Security beneficiaries, it may make more sense to use a measure other than the CPI-E, which only rebalances the data collected for the population as a whole, concluded. the research.

“If we were to create a perfect world, it might be worth having a separate CPI for the elderly or those receiving Social Security benefits than for the rest of the population, because their spending patterns are slightly different,” Alicia says. . Munnell, director of the Retirement Research Center.

However, that change shouldn’t be a top priority, Munnell said, as more urgent solutions are needed to improve Social Security solvency. According to the latest estimates, if nothing is done by 2034, only 78% of benefits will be paid.

Beneficiaries now concerned about rising prices can take comfort in the fact that this will be factored into next year’s COLA, Munnell said.

But there is no guarantee that the annual increase in 2023 will be the same. If inflation falls, the adjustment, as measured by the CPI-W, may be lower.

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