How the Government Measures Inflation Can Mean Bad News For Your COLA

How the Government Measures Inflation Can Mean Bad News For Your COLA

Mary Johnson, editor

When it comes to the Social Security cost-of-living adjustments (COLAs) many, if not most, of you say that you feel the government is cooking the inflation data.  The COLA seldom seems to reflect the growing costs you experience.  Two factors are to blame; the choice of a consumer price index used to calculate your COLA, and the methodology that our government uses to calculate price inflation to begin with.

While you may be familiar with the problem of our government using a price index that reflects the inflation experience of younger workers rather than retired people over the age of 62, you quite likely have not heard very much about the specifics of how our government calculates price indexes.  What the average person thinks of as a straight - forward mathematical calculation, the federal government can approach in convoluted ways.

Here’s a hypothetical example: Let’s say that you shop at the same grocery store every week.  The price of navel oranges varies by the time of year, but in December of 2018 you were able to buy navel oranges for about $1.39 a pound.  By June of 2019, however, the price goes up to $1.49.  That’s a difference of $.10 a pound and a 7% jump in cost.  That’s price inflation.

However, as you may already suspect, that’s not necessarily the way our government calculates the change in price.  The federal government doesn’t simply calculate the difference in cost of navel oranges from one period to another.  If another type of orange, such as Valencia is priced lower, at $1.39 per pound in June when navel oranges are $1.49, then our government assumes you buy the lower-cost orange, whether or not you actually do so.  The price change from $1.39 in December of 2018 for the navel oranges to $1.39 in June of 2019 for the Valencias would show no price increase at all for oranges.  It would show prices are flat, and that would be reflected then in the overall CPI.  One obvious problem is the fact that consumers can’t always readily substitute lower-costing items in certain expenditure categories, especially for things like medical services and prescription drugs.

The problem of how our government calculates price inflation affects more than just Social Security benefits.  The consumer price index is also used to adjust many federal programs and other aspects of our laws such as the federal poverty limits and the federal tax code.  By growing more slowly, fewer people qualify for safety net programs, or the federal tax code exemptions become less generous over time, and taxpayers pay more in taxes.

Since the start of the first CPI in 1940, the BLS has made changes to how it calculates price inflation — most recently announcing changes to how they collect price data.  A new paper reports that the BLS has undertaken several pilot projects in an attempt to supplement and/or replace its traditional field collection of price data with “alternative sources.”  If that sounds suspicious, you have good reason to ask questions.  The BLS Handbook of Methods lists more than 21 changes that economists have made to how they calculate the CPI since 1987.  In most cases the so-called “improvements” tend to slow the measured rate of inflation.  That means the growth in COLAs is cut and Social Security benefits grow more slowly over time.  In short, this boils down to an erosion in the buying power of your Social Security benefits when, in reality, prices are actually going up.

The COLA isn’t living up to the promise of protecting the buying power of your benefits, and retirees are getting short changed. We need to work together to enact legislation that will provide a more fair and adequate COLA.  To learn how you can get involved visit:


Source:  Chapter 17. The Consumer Price Index, Handbook of Methods, The Bureau of Labor Statistics, updated April 18, 2019.