Congressman John Garamendi (D-Modesto, CA) has introduced the CPI-E Act of 2017 (H.R. 1251). The bill would require the Cost of Living Adjustment (COLA) methodology to use CPI-E as opposed to the currently used CPI-W when calculating changes in retiree benefits for both Social Security recipients and annuities provided under the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS).
“The fact that we do not do this already is shocking. Instead, cost-of-living adjustments, or COLAs, for seniors collecting Social Security and those retired from the military or federal service, are based on the costs experienced by, quote: urban wage earners and clerical workers. They are not based on the costs that they – as elderly individuals – experience. And that doesn’t make a lot of sense,” stated Richard Thissen, president of the National Active and Retired Federal Employees Association (NARFE).
Retirees began receiving automatic annual COLAs in 1975. When Congress first approved automatic cost-of-living adjustments as part of the 1972 Social Security Amendments, the only Consumer Price Index available was the index now designated as CPI-W. Before that, benefits were increased only when Congress enacted special legislation.
Since the 1970s, the Bureau of Labor Statistics, which produces the Consumer Price Index, has expanded the number of CPIs and developed an experimental inflation measure designated as the Experimental Price Index for the Elderly (CPI-E).
The CPI-W measures changes in prices for a market basket of goods and services purchased by a household where more than one-half of the household’s income must come from clerical or wage occupations. The CPI-W population represents about 28 percent of the total U.S. population.
Presently, the experimental CPI-E is calculated using urban households that include a reference person or spouse who was at least 62 years of age. This represents approximately 19 percent of the current CPI sample.
BLS has found that in four of the seven major expenditure groups measured by CPI older households are allocating a larger portion of their total expenditures to categories that are increasing most rapidly, including medical care costs.
Changing to CPI-E comes with costs
There would be a cost of several million dollars if the CPI-E was to be used to calculate changes in retiree benefits. The index sample would have to be expanded to make it statistically defensible, and BLS would also need to put greater resources into collecting information on senior discounts that may affect final pricing of goods and services.
Some other members of Congress are also considering switching CPIs, but they are proposing a switch from the CPI-W to the Chained Consumer Price Index for All Urban Consumers (C-CPI-U).
The C-CPI-U attempts to capture consumer expenditure substitutions to better reflect consumers’ true cost-of-living changes.
On their website, the BLS cites the example of consumer preferences between pork and beef:
Pork and beef are two separate CPI item categories. If the price of pork increases while the price of beef does not, consumers might shift away from pork to beef. The C-CPI-U is designed to account for this type of consumer substitution between CPI item categories. In this example, the C-CPI-U would rise, but not by as much as an index that was based on fixed purchase patterns.
As a result, the C-CPI-U has proven to rise at a slower rate than the CPI-W or the CPI-E over the past decade, which would save the government money by lowering increases in retiree benefits.
Similar to the bill introduced by Congressman Garamendi was the CPI-E Act of 2015, which died in a Subcommittee of the House in November 2015.
It is unclear whether a change from the CPI-W to the CPI-E or the C-CPI-U will be approved by Congress this year.