Alexandria, VA (October 24, 2011) In January, for the first time in two years, Social Security recipients will get a sorely-needed cost-of-living adjustment (COLA). Benefits will rise 3.6% in 2012, following a surge in inflation that occurred even while seniors had no annual increase to help meet rapidly rising prices. Stagnant COLAs may soon be a fact of life for beneficiaries - a change that would also lower lifetime Social Security benefits, especially for Baby Boomers, warns The Senior Citizens League (TSCL), one of the nation's largest nonpartisan seniors groups.
A powerful Congressional deficit reduction "super committee" is working on a plan, due by Thanksgiving, to lower the federal deficit by at least $1.2 trillion. "TSCL is deeply concerned that a change to a more slowly-growing 'chained' consumer price index (CPI) which is used to calculate the annual COLA boost may be part of the plan," says Larry Hyland, Chairman of TSCL. The proposal to switch to the chained CPI was given serious consideration in the closed-door debt limit meetings by Congressional leaders and President Obama earlier this summer. Switching to the chained COLA was proposed by two prominent deficit reduction commissions and has received support from both Republicans and Democrats.
Proponents say that the change is needed because the CPI is inaccurate and doesn't reflect the effect on inflation when consumers substitute different types of lower-costing goods and services as prices increase. They argue that the government overpays Social Security beneficiaries because the current index is inaccurate and overstates inflation.
But a study of typical senior costs conducted by TSCL indicates that COLAs aren't doing a very good job of keeping up with rising prices now, primarily because the CPI isn't fully reflecting the portion of income that seniors must spend on rapidly rising healthcare costs. The study found that the Social Security benefits have lost 32 percent of their purchasing power since 2000.
"Using the chained CPI to calculate COLAs would make the problem even worse," Hyland contends. "The chained CPI is calculated much differently than the Consumer Price Index for Workers (CPI-W), the current CPI, and would have a significant effect on reducing the total amount of lifetime Social Security benefits that people receive," Hyland says. "The data certainly suggests this is the case," he adds.
During the years in which inflation as measured by the CPI-W has been the highest, the difference between it and the chained CPI has been greatest. In 2008, for example, when the CPI-W paid a COLA of 5.8% the following year, the chained CPI would have only paid 5.2%, a difference of 0.6 of a percentage point. "And if the government were to use the initial chained CPI data to calculate COLAs for 2012, seniors would get just 2.7% instead of 3.6%, a difference of 0.9 of a percentage point," Hyland says.
TSCL recently released an analysis of the proposal that estimates the chained CPI would cut the growth in average benefits of $1,100 today by $18,634 over the course of a 25-year retirement, and that assumes that the economy becomes more stable soon. The reductions in COLA growth compound over time, and are the deepest when seniors are the oldest and sickest. By the time seniors are in their late 80s or 90s, when they are most likely to have chronic health problems, monthly benefits would be about $145 lower using the chained CPI.
TSCL is fighting the plan to chain COLAs and believes seniors need a COLA that more adequately protects the buying power of their Social Security benefits. "Members of Congress are more likely to re-think voting for legislation when they see a large number of seniors are adamantly opposed to cutting COLAs," says Hyland. To learn more about proposals that would affect your Social Security benefits, get tips on reducing your Medicare costs, and sign up for TSCL's free online newsletter The Social Security & Medicare Advisor, visit TSCL at www.SeniorsLeague.org.