By Mary Johnson, editor
Social Security recipients were short-changed last year at the very same time food prices forced roughly half of all older adults to apply for food stamps or to visit food pantries. The 1.3% cost-of-living adjustment (COLA) received in 2021 was much lower than actual inflation in 2020.
The problem starts with the assumptions used about the portion of income that consumers must spend on each good and service. When unemployment is high, incomes drop and consumers spend a bigger portion of their incomes on goods and services. The categories that grow in this manner gain “weight,” or take more of one’s income. Accuracy problems arise when economists assume that consumers spend a lower portion of their incomes on items than they actually do. This tends to understate the actual rate of inflation even if prices haven’t otherwise shown big changes.
Recently, I put in a request for information to the Bureau of Labor Statistics (BLS). Among other information, my contact shared an unexpected link to a research paper by a noted Harvard economist which confirms that inflation during the COVID-19 pandemic was significantly higher in 2020 than the BLS-produced consumer price index (CPI) actually measured. Economist Alberto Cavallo of the National Bureau of Economic Research stated that the sudden changes in expenditure patterns due to COVID-19 (such as spending more for food at home and less on transportation, restaurants and airlines), lead to price changes that aren’t fully captured under normal U.S. Bureau of Labor Statistics (BLS) price change methodology.
This is not opinion. Cavallo makes a statement of fact. The BLS tracks inflation using a “market basket” of goods and services that consumers typically buy. The market basket assumes that consumers spend a certain percentage of their incomes on each item, but those percentages are only updated every two years. The thinking is that consumers don’t normally change their shopping habits very much. In 2020, the BLS calculated the CPI using expenditure data from 2017 and 2018. But in 2020, the year that determined the 2021 COLA, income and shopping patterns changed dramatically. The usual weighting methodology no longer represented the actual spending patterns of consumers during the pandemic.
You know what happened! It was a rare situation that many have never faced in their adult life — at least here in the U.S. We encountered shortages, rationing through “quantity limits,” high prices and, in too many cases, out right price-gouging. Consumers had to take what they could find, at the price that was charged, or leave it.
Shopping around wasn’t an option for many older adults due to health reasons. Our doctors told many of us to stay out of stores and to stay home. We shopped more online while we scaled back shopping trips. Grocery stores were often out of stock on various items, while the selection and variety they did have in stock has been more limited. We sometimes paid full price for goods that, just, two three years ago, would have been discounted through outlet stores as slightly imperfect “seconds.” Worse yet have been the discovery of produce in advanced stages of decomposition among our online ordered grocery pick-up.
To adjust the measurement of inflation more closely to the way consumers were actually experiencing prices, Harvard researcher Cavallo built his own “COVID market basket” CPI. He compared cost increases he found, with the BLS-produced CPI. Using publicly available credit and debit card price expenditure data, Cavallo showed that COVID inflation in 2020 was in fact higher than what the CPI at the time reflected. For example, by May 2020, the inflation rate of his COVID index was seven times higher than the May CPI produced by the BLS equivalent — 0.95% compared to only 0.13%.
Cavallo wrote, “These findings imply that the cost of living for consumers is rising faster during the COVID crisis.” He goes on to say that “low-income households are experiencing more inflation during the crisis,” because they spend proportionately more of their incomes on food.”
So far, nothing has come of Cavallo’s research on the inflation of 2020. In addition, in the fall of 2020, when it was clear the COLA would only be a miserable 1.3%, Congress ignored TSCL’s call for an emergency 3% COLA for 2021. Thus, the COLA failed the very people it’s intended to protect from soaring inflation last year.
Now TSCL has redoubled efforts to strengthen Social Security benefits in the following ways:
- Provide an emergency $1,400 additional stimulus check for all Social Security beneficiaries,
- Boost Social Security benefits by about $30 per month to make up for the 2022 COLA shortfall,
- Provide a fair and accurate measurement of inflation experienced by Social Security recipients by using a seniors consumer price index, and ensure that that the COLA is never less than 3% through a minimum COLA guarantee.
Sources: “Inflation With COVID Consumption Baskets,” Alberto Cavallo, National Bureau of Economic Research, Harvard Business School, June 2020, Revised July 2020, https://www.hbs.edu/faculty/Pages/item.aspx?num=58253.
