Politics and Retirement Income: The CPI-E and Its Impact On the COLA

Legislation has been introduced to use the CPI-E for calculating an annual COLA or use a higher figure if the CPI-W is more. How much of a difference would this make in retirement income?

What is the CPI-E?

The Consumer Price Index for Americans 62 and older, or R-CPI-E, is calculated by the Bureau of Labor Statistics (BLS). It measures price changes based on the spending patterns of the elderly, often different from the general population. The R-CPI-E is not an official measure of inflation and deflation, but it is used by those interested in measures of price change specifically based on the spending patterns of the elderly.

Legislation is often introduced in Congress to change how the annual COLA is calculated so that the expenses of older Americans can be calculated more accurately. The costs of the elderly and the inflation rate for these expenses are usually different than those of younger portions of the population.

How the CPI-E Would Benefit Retirees

The Government Accountability Office (GAO) has previously highlighted what many readers are experiencing. Namely, the annual inflation for products and services used by elderly Americans is going up faster than the yearly COLA for the coming year.

The Bureau of Labor Statistics (BLS) agreed with the GAO recommendation to “explore cost-efficient ways to evaluate the data currently used to produce subpopulation indexes….”

The CPI-E has not been implemented. It was created in 1988 but is considered by BLS to be experimental only and not used by the government to adjust retirement benefits.

Using the CPI-E instead of the current calculation is supported by the National Active and Retired Federal Employees Association (NARFE):

Under the current COLA calculation method, which is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), retirees lose purchasing power due to underestimated inflation. The CPI-W tracks the spending habits of the urban workforce, thus inadequately assessing the differences in costs for the goods and services seniors frequently purchase. For example, medical care costs for seniors are double the rate of the general population.   

The CPI-E, in contrast, only tracks the spending habits of Americans age 62 and older thus better representing federal retirees and the costs associated with living on a fixed income. When measuring costs experienced by seniors with the CPI-E, inflation is greater by an estimated 0.27 percent per year than what the CPI-W shows, highlighting the need for Congress to take up this key legislation.

Legislation Proposed to Require Using CPI-E

Changing how the annual COLA is calculated will require legislation.

Bills have routinely been introduced in Congress to require using the CPI-E for determining the annual cost of living adjustment (COLA). Federal employees are familiar with the annual COLA as it is used to raise payments on Social Security and federal annuity payments yearly in which inflation increases enough to require a payment increase.

The Social Security Expansion Act (S. 393) was introduced by Senator Bernie Sanders (I-VT). This bill would expand Social Security Benefits and also raise taxes. This bill has nine co-sponsors in the Senate. The Social Security Expansion Act has also been introduced in the House (HR 1046) where it has 35 co-sponsors.

This bill would raise some benefits and taxes related to the Social Security program.

Changes to benefits would include:

  1. Increasing the primary insurance amount for some beneficiaries;
  2. Revising the method of calculating cost-of-living adjustments;
  3. Establishing a new minimum benefit for certain low earners; and
  4. Allowing some children of retired, deceased, or disabled workers to receive benefits until age 22 if they are full-time students.

Changes to taxes would include:

  1. Increasing the net investment income tax and making active trade or business income subject to this tax; and
  2. Extending payroll taxes on wages, salaries, and self-employment earnings to income above $250,000 (the maximum amount subject to the Social Security payroll tax is currently $168,600 for 2024).

Social Security 2100 Act Introduced

This bill (S. 2280) was introduced in July 2023 by Senator Richard Blumenthal (D-CT). This bill is different in that it would use either the CPI-E or the CPI-W in calculating the COLA. It would require calculating COLAs using either the CPI-W or CPI-E in a given year—whichever provides the highest inflation measure in a given year.

This bill would also repeal the Windfall Elimination Provision and the Government Pension Offset.

A companion bill (HR 4583) has been introduced in the House. It has 182 co-sponsors. This bill has four co-sponsors in the Senate. The higher COLA calculation would increase the program’s cost and benefits to recipients.

GovTrack estimates that these bills do not have a chance of passing in Congress. Since these and similar bills are frequently introduced, and the change would be popular with many voters, it is possible, if not likely, that using the CPI-E calculation method will eventually be required.

Calculating the Difference in CPI-W and CPI-E and Using the Highest Calculation

The item of most interest to federal retirees (and future federal employee retirees) is how much of a difference this change would make. No one can predict the future, but here is how the last ten years of the COLA calculation would have changed. This time frame has years in which the annual COLA was zero and years when the COLA was the highest it has been since 1981 (8.7%).

The total difference using the two alternate methods of calculating the CPI displays two different totals. The compounded total reflects compounding the difference each year. This is what the annual COLA would have been if the CPI-E had been in effect from 2015-2024 and what the CPI-W was under the current COLA calculation.

As expected, the “Using the Highest Calculation” category is higher than the other two methods of calculating an annual COLA. This is a simplified calculation done with artificial intelligence to show the impact of compounding the impact of a COLA. While the government may use a different calculation method should this legislation pass, the chart is an example of how COLA adjustments accumulate over time.

YearCPI-WCPI-EUsing the
Highest Calculation
Compounded Total30.92%31.4%35.8%
Calculations computed using AI from Copilot with GPT-4.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47