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Encore
A blog about living in and planning for retirement

Are Social Security Raises Already Too Low?

iStockPhoto

As I reported on SmartMoney.com today, lawmakers are considering a new way to calculate the consumer price index that, if implemented, would likely result in lower Social Security increases for many seniors.  But in the course of reporting the story, I also learned that some critics say that our current measures of inflation already lead to lower-than-deserved Social Security increases for seniors.  Here’s the scoop.

For years, economists and lawmakers have argued over which inflation measure most accurately reflects the price inflation faced by retirees.  The two most widely used measures are the CPI-U, which measures price inflation for typical urban consumers, and the CPI-W, which is a subset of the CPI-U that looks specifically at consumers in clerical and wage occupations.  But critics say these measures fall short when it comes to measuring inflation for seniors. “Inflation for retirees is different from and mostly higher than the macro-economic (average) inflation rate for the entire population,” writes Huaxiong Huang, a mathematics professor, and Dr. Moshe A. Milevsky, a finance professor, both a York University, in a July 2011 study published in the Journal of Pension Economics and Finance.  That’s because “seniors spend differently than younger people do,” says Johnson.

In fact, “on average, the elderly spend relatively more on health care, whose price has tended to rise faster than overall prices,” writes Brian Cashell, author of the 2010 “A Separate Consumer Price Index for the Elderly” paper prepared for the Congressional Research Service. Thus, not only do the prices for health care rise faster than other prices, seniors are also disproportionately affected by these prices since they spend more on health care than other groups.  But the current CPI measures, which are used to calculate COLA, do not reflect this.  “Seniors’ cost of living goes up a little more quickly than others, and we should account for that,” says Milevsky.

There’s a lot a stake here, since inflation is used to calculate cost-of-living adjustments for Social Security payments. Thus, the higher the inflation projections, the more money seniors might net. And that’s why some analysts and economists are arguing for the use of the CPI-E, an experimental CPI that measures price inflation specifically for the elderly, as the CPI-E would likely yield higher payouts. The CPI-E more heavily weights things like health care and housing, which seniors tend to spend a higher portion of their income on than younger people, while deemphasizing things like apparel, food and transportation, which they tend to spend less on. And in several studies, the CPI-E did, in fact, yield a higher number for inflation: The average annual rate of change for the CPI-E between December 1982 and December 2009 was 3.2%, while the CPI-W rose at a 2.9% rate, according to a 2010 report for the Congressional Research Service.  And while that may, on its surface, seem like a small difference, it can have “a significant impact because of the compounding effects year over year,” Johnson says.   Case-in-point: If Social Security used the CPI-E to track for its cost-of-living adjustments, average benefits would have been $14,000 higher from 1984 to the present than they would have using the traditional method, according to an analysis by The Senior Citizens League.

To be sure, the CPI-E is far from a perfect measure of the inflation that seniors face.  For one, the CPI-E is only an experimental measure, Johnson warns, and thus may have some calculation flaws — such as the ideal spending weights for seniors — that throw off its conclusions.  Secondly, at least one study suggests that the differences between the inflation affecting various groups often isn’t stable over time, which means that the differences we see today may not exist in the future. Finally, there are vast differences in the inflation experience even within the elderly population itself, which may make the difference between the CPI-E and other measures relatively insignificant for some, according to Brian Cashell’s report for the Congressional Research Service on the CPI-E.  “If there is a great deal of variation in both the general population and within subgroups such as the elderly, a small difference in average inflation rates between groups may not be significant,” he writes.

Comments

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (5 of 11)

View all Comments »
    • Congress needs to eliminate the limit of income on which SS is paid. If you never paid into SS then you should not be eligible for medicare. Make benefits for disability benefits more stringint and if you are disabled then you should not be able to work for a minimum amount each month. To further reduce the debt eliminate the earned income credit. Who ever thought you could get a refund for more than you paid in income taxes!!!!!!!

    • I am totally confused about what I have been reading about raises in SS. My husband and I are retired/disabled and having to live on SS alone. We haven’t had a raise in four years all the while the cost of living, especially rent, continues to rise. So, are they only giving some people a yearly raise and not others? Or if they are not giving anyone a yearly raise then why is there a question at all as to what percentage of a raise is to large or to little?

    • How Inflation Benefits Uncle Sam

      The official policy of the U.S. Government has been to maintain a average inflation rate of about 3%/year. This has in fact, been the case overall since 1969. All the jib-jab about low inflation is just noise from noisy people who don’t know very much (“Don’t Know”)or can not remember.

      The CPI calculation affects way more than social security benefits, by the way. It also affects Federal, State, county and city employees and retirees, as their paychecks (COLA’s)and pensions are partially determined by the annual CPI numbers. All government pay and benefits can effectively be cut by further reducing the annual COLA’s that are paid. This is the trend for govt. workers: Work longer, collect less $. Yep, Obama is your man.

    • why are blaming the seniors for budget. they have paid their share in to ss and are still paying taxes on it at the end of the year. why did everyone else get a cost of living raise and the seniors. Just remember you all will be there one day and saying same thing.??? and you are paying into it now. So question where your money is going the government needs to stop borrowing and pay back what took and there would be no problem.!! at this point it is just a bunch of baby boomers snotts trying to run the country. shame on you

    • we need social securty help help bill and wake up america and dont act stupid

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

MarketWatch - Stock Market Quotes, Business News, Financial News
Bulletin
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New York Markets After Hours

need to know
When do markets close for Labor Day?
ISM services index slows, but tops forecast
Jobless claims rise to two-month high
U.S. trade deficit shrinks 7.4% to $41.9 billion
L.L. Bean longtime CEO Leon Gorman dies
Treasury's Lew irked by China's FX move
Kentucky clerk jailed over marriage licenses

Six actors who were almost cast as James Bond

Oops — Rick Perry says broken clock right once a day

Sizeable outflow from China adds to fears

Ad war over oil exports heats up as vote nears

What it’s like to play tennis with a ‘smart’ racket

Tom Brady’s ‘Deflategate’ suspension overturned
The real Deflategate verdict? NFL’s in trouble

Immigration to Germany hits highest mark since 1992

Chaos at Budapest train station as migrants rush trains
Budapest and Europe face a migrant crisis
Syrian refugees reach Norway — via the Arctic
Father of drowned Syrian boy describes voyage

Gates: How we can avoid worst of climate change

Watch China’s    90-minute parade in 60 seconds
Xi talks peace, but China parade flexes power
China markets close for war anniversary

Blame Marissa Mayer for maternity-leave shrink

Karl Lagerfeld is coming to a store near you

These are the college majors that are dying

They tangled with student debt all summer
College help for low-income families

Investment risk has changed, so this must change too
Volatility is driving foreign buyers to Treasurys

The search for 1,000 angels to help women startups

43% of U.S. homes are at high risk of natural disaster

Why the U.K. Hugo Chavez will be good for its economy

Why India is worth a look if you’re cooling on China

Apple’s biggest challenge: Topping the iPhone 6
Apple set to join content contest
What to expect from the Apple event on Sept. 9
/conga/frontpage.html 354111

Markets »

109.73MDow Volume:
Avg Vol: 113.01M
Unchanged
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Decliners
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3709
Price Chg %Chg 1 Day
Range: 1 Day
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Dow
/quotes/zigman/627449/realtime 16,375 +23 0.14%
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S&P 500
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Gold
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FTSE 100
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CAC 40
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5 yr CD
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MMA $10K+
0.3%
MMA $50K+
0.4%

National averages from Bankrate.com

You Don’t Need Another Credit Card, You Need A Better One.
Avg. APR Last Week 6 Months
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Business 12.85% 12.85% 12.85%
Student 13.14% 13.14% 13.14%
Balance Transfer 14.12% 14.12% 14.00%
Airline 15.10% 15.10% 15.15%
Reward 15.14% 15.14% 14.99%
Cash Back 15.27% 15.27% 15.26%
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Bad Credit 22.73% 22.73% 22.48%
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