Ask The Advisor: COLA Determination

Ask The Advisor: COLA Determination

What Is Tracked In Determining The COLA?

Q: In determining the COLA what items does the government track for price changes? Why does the COLA grow so much more slowly than my costs?

A: It’s not what the government tracks that causes your Social Security cost-of-living adjustments (COLAs) to grow so slowly. It’s what the government isn’t tracking that’s keeping your COLAs so low. It may surprise you, as it did us at TSCL, to recently learn that COLAs are calculated using methodology that doesn’t directly measure what you pay out-of-pocket for health insurance premiums. Add to that the fact that the consumer price index (CPI) the government uses to calculate COLAs (CPI-W) represents the spending habits of younger urban wage earners and clerical workers — or the spending habits of only 29% of the U.S. population. That’s certainly not going to reflect the inflation experienced by most Social Security recipients.

Both retirees and the disabled spend a very significant portion of their incomes on healthcare costs. For many, health insurance premiums are the most significant expense that they incur every month. That includes what the government automatically deducts for Medicare Part B, and what individuals shell out for a Medicare Advantage plan or Medigap policy, and Part D drug plan. According to a policy brief from the Kaiser Family Foundation, premiums account for the largest share of Medicare beneficiaries' out-of-pocket health spending. Four-in-ten Medicare beneficiaries spend more than 10 percent of their income on premiums alone. To get a better idea of what the government does track, here’s a list from the Bureau of Labor Statistics (BLS). The BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each include:

• Food and Beverages: (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)

• Housing: (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

• Apparel (men's shirts and sweaters, women's dresses, jewelry)

• Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)

• Medical Care (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

• Recreation (televisions, toys, pets and pet products, sports equipment, admissions);

• Education and Communication (college tuition, postage, telephone services, computer software and accessories);

• Other Goods and Services: (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Of particular importance is the portion of income that seniors and the disabled must spend on each particular category. Under the CPI-W, out-of-pocket medical costs are weighted or assumed to account for only 5.6% of total expenditures. National surveys indicate that Medicare beneficiaries spend far more. The Kaiser Family Foundation reports that median out-of-pocket health care spending as a share of income for Medicare beneficiaries was about 16.2% by 2006.

TSCL strongly supports legislation that would correct how COLAs are calculated to more accurately represent what seniors and the disabled must spend on their out-of-pocket healthcare costs. We strongly encourage you to contact your Members of Congress and attend local town halls during the upcoming campaign season. Help us make the case why a fair and adequate COLA is a necessity to protect Social Security benefits from losing buying power as costs rise.

Sources: “How Much ‘Skin In The Game’ Is Enough?”, Kaiser Family Foundations, June 2011. “Measuring Price Change For Medical Care In The CPI,” Bureau of Labor Statistics, accessed March 3, 2012.

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