The Social Security Administration just announced Social Security's COLA or cost-of-living adjustment for 2017, and it is tiny. Retirees will likely see just a $4.00 increase (.03 percent) in their checks beginning in January. A new report from the National Academy for Social Insurance explains how Social Security benefits are calculated.
The COLA is intended to guarantee people receiving Social Security checks the same purchasing power each year. It is supposed to account for price inflation. This inflation protection should ensure that Social Security benefits do not erode as older adults age. As we know, their savings, pensions and other income tends to decrease as they age. So, their dependence on Social Security increases.
Unfortunately, the Social Security COLA is not delivering adequate inflation protection to older adults. Here's the reason: The Consumer Price Index measure, upon which the Social Security cost-of-living adjustment is based, the CPI-W, does not reflect the price inflation that older adults experience. Rather it is based on the price inflation experienced by the 28 percent of the population who are city workers and clerical workers.
In 1988, the Bureau of Labor Statistics created an experimental CPI index to cover spending of people 62 and older. It named it the CPI-E. But, Congress has chosen not to use this measure for Social Security cost-of-living adjustments. To be clear, it would presumably rise much faster than the CPI-W since older adults spend a lot more on health care than city and clerical workers, and health care costs are rising much faster than other costs.
Of note, the CPI-W assumes that when prices go up for a product or service, people will buy a different product or service that is similar. For example, if the price of white chicken meat goes up, it assumes people buy less costly dark chicken meat or pork instead. It's not at all clear that older adults are able to make these substitutions with their health care services. If they cannot, this assumption baked into the Social Security COLA erodes their purchasing power.
What's worse is that some members of Congress want to move to a "chained" CPI for Social Security benefit increases, a measure that assumes that, when prices rise, people make tradeoffs between dissimilar products and services. For example, if housing costs rise, they might spend less on food. While this may be true, proponents of the chained CPI fail to take into account that it would threaten people's health and financial security. It would further reduce their Social Security checks. It reins in the rate of growth of the CPI by .3 percentage points. It's called the chained CPI-U.
Social Security Works and others want to expand Social Security. They argue that we need a better CPI-E, with a bigger sample size that appropriately represents all older adults. This CPI-E would best reflect the cost of living for older adults. It would give more weight to health care cost increases. To support expanding Social Security benefits, click here. To learn when to claim Social Security benefits based on your situation, click here. And, to find out what your Social Security benefits will be when you retire, click here.