A Fairer and More Economical Way to Calculate Social Security COLAs

The author proposes an alternate way of calculating the cost of living allowances for Social Security based on the process of computing cost of living adjustments for federal retirees that he says would result in tremendous long term savings.

For the last few years, there have been two positions on Social Security’s Cost of Living Allowances (COLAs).

The first position is to keep the current COLA computation, which is based upon the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The second position is change the COLA computation formula to the “Chained CPI” or Chained Consumer Price Index for All Urban Consumers (C-CPI-U) which results in lower COLAs.

The Bureau of Labor Statistics can provide a full description of these Consumer Price Indexes, but the obvious reason for suggesting a change to Social Security’s COLA is to save money. The fear of  lower COLAs, however, is that over time, many retirees will have much less money which may leave many in poverty.

I have a new COLA proposal which I call the Maine COLA. This proposal will save significant program money (I estimate 10 year Savings of $100,000,000) but have minimal negative impact on individual retirees.

First, let’s back up and talk about why Congress thought COLAs were needed. The one word reason was inflation. Over time, inflation significantly eroded the buying power (and therefore the lifestyle) of retirees living on a fixed income such as Social Security. The sole purpose of a COLA is to maintain the retiree’s buying power, to offset inflation. The COLA is paid in January, to offset the loss of buying power that has occurred over the last 12 months.

In Maine, we often refer to our sixth sense which is, in essence, common sense. My COLA proposal is just that: common sense.

The proposal is to prorate the Social Security COLA for a retiree’s first year of retirement based upon how long in the prior year the person has been retired.

How many months was their retirement impacted by inflation? If the person was retired for the full year, then they receive the full COLA. If the person has been retired for one month, and therefore suffered only one month of inflation while retired, then the person would receive one-twelfth of the COLA.

Sound radical? On the contrary, this sounds like the standard operating procedure for the COLAs received by all federal retirees including Congress. Millions of federal retirees received their first year COLA as a prorated COLA, and it did not result in a flood of letters to their elected representatives in Congress or a campaign by NARFE because it was logical and fair.

The Office of Personnel Management, which administers federal benefits, explains the prorated  COLA provision for 2013 as follows:

“To get the full COLA, a retiree or survivor annuity must have begun no later than December 31, 2012. If not, the increase is prorated… Prorated accounts receive one-twelfth of the increase for each month they received benefits. For example, if the benefit commenced November 30, 2013, the prorated COLA would be one-twelfth of the full COLA.”

The COLA for 2013 was set at 1.5% which meant that everyone receiving an annuity would receive the full 1.5% increase except those who had not actually been retired for the previous 12 months.

The 2013 Civil Service Retirement System COLA was prorated as follows:

Month Annuity Began % Increase
December 2012 1.5
January 2013 1.4
February 2013 1.3
March 2013 1.1
April 2013 1.0
May 2013 0.9
June 2013 0.8
July 2013 0.6
August 2013 0.5
September 2013 0.4
October 2013 0.3
November 2013 0.1

Source: opm.gov

Social Security awarded new benefits to almost 6 million people in 2012, and due to the baby boomers, this number will significantly increase each year for the next few years.

Prorating the COLA for millions of new retirees is fair, logical and is the same procedure that has been in place for years for federal retirees.

Robert White retired from the Social Security Administration after a nearly 40 year career.