Cheap gasoline and home heating oil have made plenty of news since last October. The plunge in petroleum prices, the steepest in six years, has also dragged down inflation. In fact, consumer price index (CPI) data through May of 2015 indicate that inflation is significantly lower than it was a year ago — so low in fact, that the annual cost-of-living adjustment (COLA) may be ZERO next year.
Market commentators portray low inflation as a boon, because consumers presumably don’t have to spend as much on goods and services. But this is not necessarily the case for the people who receive COLA - adjusted benefits.
In reality, housing, and medical costs are climbing, just not dramatically enough to offset the deeper crash in petroleum prices. But more importantly, some of the biggest cost climbs are masked by the government’s convoluted way of measuring inflation. The prices of generic prescription drugs, for instance, are making unprecedented climbs, but those costs aren’t measured in the way that the average person measures increasing costs. Here are four things you may not know about the COLA:
- The COLA for retirees isn’t calculated on the buying habits of retirees. — The annual increase for retirees isn’t based on rising retiree costs. To the contrary, it’s determined by the increase in goods and services used by younger urban workers, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W accounts for just 32 percent of the total U.S. population and specifically excludes the spending habits of people age 62 and older. Younger workers have different spending patterns than retirees.
- The COLA assumes that retirees use lots less medical goods and services than they actually do. There’s a big difference in the amount of money that older people have to spend on medical care than younger workers. The CPI-W, for example, assumes that younger workers spend 5.6% of their incomes on medical care. Studies by the nonpartisan Kaiser Family Foundation, and surveys by TSCL, indicate that, in reality, retirees spend almost three times that much, about 15% of their income on medical care.
- The COLA for retirees doesn’t include the rising cost of Medicare premiums. It’s one of the fastest rising costs in retirement. Medicare Part B premiums increased by 131% over the past 15 years. Because the CPI-W surveys the market basket of younger workers, it doesn’t include cost increases of Medicare premiums. In fact, direct pricing of health insurance policies is not included in the CPI at all.
- The COLA doesn’t mimic the way retirees pay for health care. The CPI-W doesn’t directly measure what consumers have to pay for health care out-of-pocket, either. Instead it measures changes in what medical providers like hospitals and doctors receive as reimbursements from insurance companies. Insurance companies negotiate substantial discounts from healthcare providers that may be considerably less than what the uninsured consumer really pays. For example, The CPI-W assumes that the cost of dental services is the amount the insurance company reimburses the dentist. The reality for older consumers is that since Medicare doesn’t cover dental services, most pay the full cost out-of-pocket.
The single strongest sign that inflation is growing more rapidly than the CPI-W suggests is the growth in the Consumer Price Index for Elderly Consumers (CPI-E). According to data through May 2015, the CPI-E was still in positive territory. TSCL believes that using the CPI-E to calculate the annual boost would provide all Social Security beneficiaries with a more fair and adequate COLA. To learn how you can help support passage of legislation, visit our home page.
Sources: “Frequently Asked Questions, Whose buying habits does the CPI reflect?” Bureau of Labor Statistics, September 17, 2014. 2011-2012 Weights for CPI-E, Bureau of Labor Statistics, March 2013. “Health Care On A Budget,” Kaiser Family Foundation, March 2012. “Measuring Price Change For Medical Care In The CPI,” Bureau of Labor Statistics, April 12, 2010.