Benefit Bulletin: January 2015

Benefit Bulletin: January 2015

Is The Government Manipulating COLAs?

Cost-of-Living Adjustments (COLAs) have languished at exceptionally low levels in recent years. Administration officials and economists point to the sluggish economy and recent economic recession as the reason. But government tinkering with the consumer price index (CPI) is playing an enormous role in reducing the measured rate of inflation, in turn cutting the growth in Social Security benefits.

For more than three decades the government has quietly made numerous changes to how the cost of living is defined and measured — asserting that the changes make the CPI more accurate. The general public for the most part is unaware of the changes, and more importantly the financial impact on benefits has never been publically disclosed.

Virtually all of the changes tend to show inflation as growing more slowly. Independent economist John Williams believes that the combined effect understates the measured rate of inflation by an astonishing 7 percentage points. One of the clearest illustrations of the impact of a major change is seen in the following chart of COLAs between 1976 and 1987.

1976 - 8%

1977 - 6.4%

1978 - 5.9%

1979 - 6.5%

1980 - 9.9%

1981 - 14.3%

1982 - 11.2%

1983 - 7.4%

1983 - housing cost measurement change

1984 - 3.5%

1985 - 3.5%

1986 - 3.1%

1987 - 1.3%

In 1983 government economists changed the way housing costs were measured in the CPI. Housing represents almost 50% of the expenditures of people age 65 and older, and thus changes to that expenditure category tend to have a big impact. Rather than basing housing costs on some measure of home prices, after 1983 the Bureau of Labor Statistics estimated costs “based on what homeowners theoretically would pay to themselves in order to rent their own homes from themselves. The BLS then estimates how much homeowners raise the rent on themselves each month,” according to Williams.

TSCL believes this type of mathematical gimmickry shortchanges the measurement of real cost increases, thereby shortchanging the COLAs of almost 58 million beneficiaries. Yet this is just one of many such changes since 1983. TSCL believes that the strongest protection Social Security recipients have against such machinations of benefits is legislation that would guarantee that COLAs would be no less than 3%. This could be paid for by lifting the Social Security taxable maximum so that high-income earners making more than $118,500 pay their fair share of taxes. This not only is fair, but would ensure more adequate benefits for all retirees.