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The un-COLA

Richard Connor, 2:58 am ET

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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BenefitJack
BenefitJack
5 months ago

Thanks. Great article.

To answer your question, yes, I still favor CPI-E – at least until there is a solution to the funding/sustainability challenge.

However, like Mr. Quinn, my 40+ years of front line experience in corporate employee benefits, working with tens of thousands of workers and over ten thousand retired workers, confirms that retirees think the Social Security COLA does not keep up with inflation. I agree that most retirees have post-retirement incomes that don’t keep up with inflation.

But, those I interact with don’t think it is so much the difference between E or W. That’s kind of a policy wonk issue. In fact, most retirees, frankly most Americans don’t know that the CPI is not a measure of inflation, but a measure of price changes for a specified, arbitrary market basket of goods.

Instead, my experience is in three parts:

  • First, whether the individual gets a monthly benefit from a pension plan, by purchasing an individual annuity, or by a scheduled withdrawal from a 401(k) or IRA, most of those income streams make no provision for inflation – so, the Social Security COLA only applies to a portion of many retirees income,
  • Second, whether it was calculated as W or E, it is based on PAST price changes – so the COLA is backfill, and
  • Third, as you state “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.” I believe that. However, starting with the Medicare Catastrophic Coverage Act of 1988 and the adoption of RBRVS and DRGs, as well as balance billing limits and the new Rx coverage from Medicare Modernization Act of 2003, adjusted by Health Reform in 2010, we have consistently conditioned retirees, set expectations, that they would have only minimal out of pocket expenses. In fact, both the point of enrollment (contributions for Part D and Part B) as well as the point of purchase (copayments, deductibles, etc.) cost sharing has averaged less than 4% per year for almost four decades (1983 to 2021)! It wasn’t magic. Limiting prices and balance billing effectively shifted costs to those not covered by Medicare, Medicaid or the Veterans Administration. And, Build Back Better doubles down and further raises retiree expectations (ignoring the funding deficit, lack of sustainability) with new Rx out of pocket expense limits as well as “negotiation” for certain Rx.

America has reduced the percentage of age 65+ Americans living in poverty from 30+% to less than 10%. The reductions started long before we got the Johnson Administration war on poverty. Remember, the poverty measure is an income measure. If you adjust for wealth, the percentage of older Americans living in poverty may be even less.

See: https://www.cnbc.com/select/average-net-worth-by-age/

So, I’m not too supportive of any change that could increase benefits (a “better” COLA or a guaranteed minimum increase) – where the cost is shouldered by workers, generations too young to vote, and generations yet unborn.

R Quinn
R Quinn
5 months ago

I’m glad someone finally pointed this out. There have been several years where the CPI- E was lower.

The expectations created for E have been unrealistic and unfair.

I also think the higher spending on health care to be a bit of a myth. While seniors may have higher utilization of health care that does not automatically translate to high out-of-pocket costs. Between Medicare, Medigap or MA and Part D seniors typically have lower OOP risk than younger families dealing with HDHP.

As a result of my wife’s eye injury her incurred medical bills were over $200,000 and counting. Our cost was the Part B deductible.

Even the combined premiums are often less than what younger workers deal with.

parkslope
parkslope
5 months ago
Reply to  R Quinn

Your criticism implies that the the CPI-E was inacurrately developed. There are some concerns about the accuracy of the CPI-E including that the size of the sample of seniors used to develop this measure may have been too small. However, it was developed based on a survey of actual seniors’ expenditures.

“Research has shown that spending patterns differ between the elderly and the general population, especially in the health care category. Seniors 65 and older spend more than twice as much on health care, and those 75 and older spend nearly three times more on health care than younger consumers

“According to the Medicare Trustees, 33 percent of the average senior’s Social Security check will be consumed by Medicare out-of-pocket costs by 2091, compared with 25 percent today.”
https://www.ncpssm.org/documents/social-security-policy-papers/the-cpi-e-a-better-option-for-calculating-social-security-colas/

R Quinn
R Quinn
5 months ago
Reply to  parkslope

Not at all, I merely said E was no magic solution to inflation and not that different as it is implied.

Lets define out of pocket costs first. If they include LTC, as a possibility and all premiums that’s possible, but out of pocket costs are the cost share of health care spending and there seniors have greater protection than younger people. And in many cases they have lower premiums than younger workers.

One high cost for seniors which is coming down is prescriptions but that is highly dependent on the type of drugs taken.

Last year my former employer dropped retiree health benefits. Except for relatively few with high drug costs we all came out ahead by now using Medigap and MA with lower OOP costs.

parkslope
parkslope
5 months ago
Reply to  R Quinn

I wasn’t aware that the CPI-E was widely touted as a “magical solution to inflation.”

The CPI-W does not survey the spending patterns of those who are 62 and up and retired, while the CPI-E is weighted by the expenditure patterns of those who are 62 and older. Because SS increases are used by seniors it would seem to make more sense to use the CPI-E regardless of the extent to which it differs from the CPI-W.

R Quinn
R Quinn
5 months ago
Reply to  parkslope

Listen to the politicians and advocacy groups many have been pushing the E for years implying it would make a significant difference. No harm in doing so though. There are a few politicians pushing for a guaranteed 3% regardless.

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