By Glenn Ruffenach
An important issue to watch in current and future debates about possible changes in Social Security is annual cost-of-living adjustments, or COLAs. Some legislators and policy makers are calling for using a new formula – a “chained” consumer price index – to calculate these adjustments. But such a change, according to two recent reports, could result in reducing claimants’ benefits.
The reports come from the National Academy of Social Insurance, a nonprofit and nonpartisan educational group based in Washington. (We’ve highlighted the academy in the past – primarily for its excellent guide, “When to Take Social Security Benefits: Questions to Consider.”) The studies are a good introduction to, first, how COLAs work and, second, how changes in COLAs might affect the federal budget – and your monthly Social Security payout.
COLAs, of course, are designed to protect benefits from the effects of inflation. Congress authorized automatic Social Security adjustments in 1972. At the time, the Bureau of Labor Statistics produced a single consumer price index, or CPI. That index measures inflation experienced by urban wage earners and clerical workers – and is still used today to calculate Social Security COLAs. (The original CPI has been renamed the CPI-W.)
In 1978, the Bureau of Labor Statistics developed a CPI to include all urban residents and called it the CPI-U. (That said, this expanded CPI hasn’t been used to calculate Social Security COLAs.) In 1999, the bureau developed a “chained” version of the CPI-U, one that “reflects the extent to which consumers make changes in their purchasing patterns across dissimilar categories of items – such as spending more on fuel and less on food – in response to relative price changes,” according to the National Academy.
Some politician and legislators now favor using this chained CPI as the basis for calculating Social Security COLAs. Some proponents, according to the academy, believe a chained CPI would “more accurately reflect the cost of living.” Others believe it would lower Social Security outlays; still others think it could help reduce the deficit.
But the National Academy – in its two reports titled “Should Social Security’s Cost-of-Living Adjustment Be Changed?” and “How Would Shifting to a Chained CPI Affect the Federal Budget?” – outlines, first, how a chained CPI “falls short of reflecting the living costs of the elderly and disabled” (because it neglects higher out-of-pocket spending for health care.) Second, the reports explain how a chained CPI would “lower benefits for current and future recipients.”
Yes, this can make from some challenging reading. But with Social Security now “in play” on the presidential campaign trail, the academy’s reports are essential reading for voters trying to stay abreast of possible changes to the system.