The un-COLA

Richard Connor

SENIORS RECEIVING Social Security celebrated the recent announcement that their benefits will increase 5.9% this January. It’s the largest cost-of-living adjustment (COLA) in 40 years, and it’s based on a measure of inflation called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

As the name implies, CPI-W is a “monthly measure of the average change over time in the prices paid by urban wage earners and clerical workers for a market basket of consumer goods and services.” The index jumped 5.9% between the third quarters of 2020 and 2021.

There have been arguments for years that this index doesn’t accurately reflect spending by the elderly. Accordingly, in 1987, Congress directed the Bureau of Labor Statistics to develop a price index that better reflected elderly spending. This experimental inflation index for the elderly is known as CPI-E.

CPI-E uses existing data, but changes its weightings to better represent modern elderly spending. For example, the elderly spend about twice as much on medical care as the rest of the population.

Boston College’s Center for Retirement Research recently published an intriguing paper comparing the two indexes from 1983 to 2021. The elderly index has risen faster than CPI-W, consistent with the thought that seniors must grapple with higher inflation. But more recently, the gap has narrowed.

In the first 20 years, CPI-E was 0.38 percentage point higher per year, on average, than CPI-W. For the period 2002-21, however, the elderly index was only 0.05 percentage point greater per year than the general inflation measure.

The authors identify two main reasons for this—trends in medical and transportation costs. Medical inflation has slowed in the last 20 years, and the pandemic lowered medical inflation still further. As people avoided routine visits to the doctor, medical costs actually declined 0.4% in 2020.

Meanwhile, transportation costs have risen fairly rapidly over the past two decades. In this case, however, seniors have been less hurt—because they use less transportation than the general public. In other words, transportation price increases have hit the general population harder than the elderly.

Do you still favor linking Social Security to CPI-E? If it had been used to calculate the 2022 Social Security COLA, the result would have been a 4.8% rise in benefits, lower than the 5.9% increase that was recently announced.

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