Ask The Advisor: April 2017

Ask The Advisor: April 2017

My Congressman Wants A More Accurate Measure Of Inflation For COLAs.  How Would That Affect My Social Security Benefits?

Q:  I received a mailing from my Representative stating that he supports a plan to save Social Security that would provide a more accurate measure of inflation to calculate annual cost-of-living adjustments.  What would this mean for my benefits?

A:  Many Members of Congress say they support more accurate Social Security cost-of-living adjustments (COLAs), but frequently fail to provide details of what they mean.  One of the best ways for the public to evaluate proposals affecting the COLA is to learn which consumer price index (CPI) the lawmaker favors for calculating the annual boost.  The choice of the CPI can make a difference of thousands of dollars in total lifetime benefits.

Recently House Ways and Means Social Security Subcommittee Chairman Rep. Sam Johnson (TX) defended the 2016 Social Security Reform Act, saying it provided “a more accurate measure of inflation for the COLA.”  His plan would switch to the more slowly-growing CPI known as the chained consumer price index to calculate COLAs for low- to middle-income beneficiaries, and abolish COLAs altogether for people with incomes higher than $85,000 individuals or $170,000 couples.  The COLA cuts alone were estimated by the Social Security Administration’s Chief Actuary to be responsible for more than half of the estimated cuts that the reform plan would produce over 75 years.

Based on how the chained CPI has performed over the past 16 years since it was first launched, average monthly benefits would be about $48 lower today if that index had been used to calculate the COLA since 2000 — a benefit cut of about 5%.  That’s precisely the opposite of what today’s retirees need to provide adequate Social Security income over retirements that can last 20 to 30 years.  According to a TSCL study, Social Security benefits have lost 23% of their buying power over the past 16 years because the current COLA is already doing such a poor job of keeping pace with rising costs.

The COLA is currently based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).  That index measures cost changes in items typically used by younger working adults.  It gives greater weight to costs like gasoline which has gone down in price in recent years, but doesn’t give as much weight to medical costs and housing which have been rising rapidly and form a bigger share of spending for people age 62 and over.

TSCL believes the most appropriate inflation index for calculating the annual COLA is the Consumer Price Index for the Elderly (CPI-E).  The index would generally provide modestly higher increases in most years.  However, in 2017, the difference between a COLA payable using the CPI-E versus what retires actually received is at the highest level since the CPI-E was initiated.  A COLA based on the CPI-E would be 2.1% in 2017, seven times higher than the tiny 0.3% that Social Security beneficiaries received based on the CPI-W.

TSCL is lobbying for legislation that would provide a more fair COLA by tying the calculation to a seniors index like the CPI-E.