Alternative Ways to Determine Future COLAs

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By on August 21, 2017 in Retirement with 0 Comments

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While Federal retirees, Social Security recipients, and others will have the 2018 cost-of-living adjustment set according to the Bureau of Labor Statistics’s CPI-W, there are other possibilities for making the automatic adjustment in 2019 and beyond.

The Bureau of Labor Statistics produces several measures of inflation, of which CPI-W, and its predecessor, is the oldest and is enshrined in law as the basis for making cost-of-living adjustments for Federal retirees, Social Security recipients, and others; but it could be changed. Only tradition and the fear of opening a political “can of worms” keeps the CPI-W as the source of the COLA calculation.

Reflecting its blue-collar history, the CPI-W measures goods and services purchased by hourly wage earning or clerical workers, which applies to a smaller and smaller percentage of the population.

Over time Congress and advocacy groups have often pushed for an alternative method of computing cost-of-living adjustments. Here are a few alternatives.

CPI-U

The other major index produced by BLS is called the Consumer Price Index for All Urban Consumers (CPI-U). The CPI-U includes expenditures by urban wage earners and clerical workers, professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, retirees and others not in the labor force.

When you hear talk about inflation, most often the CPI-U is cited, and it reflects a much larger share of the U.S. population than the CPI-W.

The two indexes track each other fairly close. For the 12 months ending in July, the CPI-U rose 1.7%, while the CPI-W increased 1.6%.

If the formula for calculating the COLA is changed, moving from the CPI-W to the CPI-U would be less controversial than other possibilities.

CPI-E

BLS also produces a monthly Consumer Price Index focused on the purchasing habits of older Americans. Titled the CPI-E (Yes, “E” stands for elderly, which some people may see as an unfortunate choice of words to describe older Americans.), the index is available monthly and has tended to rise faster than the CPI-U or CPI-W.

It attempts to measures the average change in prices over time for a fixed market basket of goods and services for Americans age 62 and older.

The National Active and Retired Federal Employees Association (NARFE) has long championed use of the CPI-E.

In March, NARFE National President Richard Thissen said that “the fact that we do not use the CPI-E already is shocking. Instead, cost-of-living adjustments for seniors collecting Social Security and federal civilian or military retirement benefits are based on the costs experienced by ‘urban wage earners and clerical workers.’ They are not based upon the costs retired individuals experience.  And that does not make a lot of sense. Worse yet, it is costing seniors, including federal civilian and military retirees, precious dollars every year.  The 2017 COLA was 0.3 percent, and the year before, there was no COLA at all.”

“Yet, over these two years, the actual cost of living incurred by seniors increased by 2.7 percent – 2.1 percent in 2016 and 0.6 percent in 2015.  That is what seniors should have received and that is what this bill would provide them.  For the average federal annuitant, that would have meant an increase of approximately $950 per year.”

BLS does not take a position on which index should be used to adjust retiree benefits, but it has pointed out that the CPI-E is a subsample of the consumer units used in the CPI-U and CPI-W. In its current form, BLS says that the CPI-E has methodological limitations which make it unreliable as a substitute for the CPI-U or CPI-W.

With more funding, the CPI-E could be developed into a statistically reliable index, but Congress would have to provide more money or take money from elsewhere to make the CPI-E a usable instrument to affect the billions of dollars spent each year on cost-of-living adjustments.

C-CPI-U

BLS has introduced a controversial measure of inflation known as the Chained CPI (C-CPI-U).

Begun in 2002, the Chained CPI is designed to mathematically “use expenditure data in adjacent time periods in order to reflect the effect of any substitution that consumers make across item categories in response to changes in relative prices. The new measure is designed to be a closer approximation to a “cost-of- living” index than the existing BLS measures,” according to BLS.

While no Consumer Price Index will perfectly capture the true cost of living for an individual, the C-CPI-U gets closer than the other indexes by better reflecting how consumers react to changing prices.

The example often provided by BLS reads as follows: 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.

Through testing, BLS has determined that the C-CPI-U tends to show a lower inflation rate than the other indexes, or although the differences between the indexes vary over time.

For this reason, among others, NARFE has opposed using the C-CPI-U in calculating Federal retiree COLAs, although some members of Congress have expressed interest in the index, possibly because lower COLAs would reduce the long-term cost of providing Federal retiree and Social Security benefits.

Eliminate an automatic COLA

It is worth remembering that Social Security benefits were not always adjusted through an automatic COLA mechanism.

“Congress enacted the COLA provision as part of the 1972 Social Security Amendments, and automatic annual COLAs began in 1975. Before that, benefits were increased only when Congress enacted special legislation,” according to the Social Security website.

Congress could change the law to revert back to requiring that legislation be passed before any benefit increases take effect.

Prior to the automatic COLAs, Social Security benefit increases were sporadic. In 1950, Congress raised benefits by 77%, reflecting that benefit amounts had not changed since being first issued in 1940.

Increases in other years included 1952 (+12.5%), 1954 (+13%), 1959 (+7%), 1965 (+7%), 1968 (+13%), 1970 (+15%), 1971 (+10%), 1972 (+20%), and two in 1974 (+7% only from March-May and +11% beginning in June based on the 1972 levels).

Congress moved to an automatic COLA formula because some saw the Social Security increases as too generous, while other argued that they failed to keep up with inflation.

Losing the automatic COLA would mean that retirees and others would have to go to Congress each year and compete for funding against other government programs.

While it is too late to change the COLA formula for 2018, Congress may decide to take another look at the alternatives as they tackle continuing budget deficits and focus on the next Presidential election in 2020.

© 2017 Michael Wald. All rights reserved. This article may not be reproduced without express written consent from Michael Wald.

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About the Author

Michael Wald is a public affairs consultant and writer based in the Atlanta area. He specializes in topics related to government and labor issues. Prior to his retirement from the U.S. Department of Labor, he served as the agency’s Southeast Regional Director of Public Affairs and Southeast Regional Economist.

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