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Institute for Workplace Studies-----------------Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor--------------------Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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NOTE: Funding for this service ends on 31 March 2015. Postings will end on this date as well.

 

Congressional Research Service (CRS)

 

Alternative Inflation Measures for the Social Security Cost-of-Living Adjustment (COLA)

Noah P. Meyerson, Analyst in Income Security

March 13, 2015

https://fas.org/sgp/crs/misc/R43363.pdf

[full-text, 19 pages]

 

Summary

Monthly Social Security payments for retired workers, disabled workers, and all other

beneficiaries are generally increased annually by a cost-of-living adjustment (COLAs), which is

based on growth in the Consumer Price Index for Urban Wage Earners and Clerical Workers

(CPI-W), a measure of inflation calculated by the Bureau of Labor Statistics (BLS). Several

proposals would base the COLA on other measures of inflation produced by the BLS. Some

would set the Social Security COLA equal to growth in the Chained CPI for All Urban

Consumers (C-CPI-U), which is projected to lower Social Security benefits. Other proposals

would use a measure of inflation experienced by older consumers, which is projected to increase

benefits.

 

Proponents of using the C-CPI-U have included the 2010 National Commission on Fiscal

Responsibility and Reform (chaired by former Senator Alan Simpson and Erskine Bowles) and

the Bipartisan Policy Center’s 2010 Debt Reduction Task Force (chaired by former Senator Pete

Domenici and Alice Rivlin). The President’s 2014 budget (but not subsequent budgets) proposed

using the C-CPI-U to compute COLAs for Social Security and in some other federal spending

programs; it also proposed indexing the tax code to the C-CPI-U, which would increase federal

revenues.

 

Proponents of basing the COLA on the C-CPI-U argue that it is a more accurate measure of

changes in the cost of living because it more fully accounts for how consumers adjust their

purchases as relative prices of various items change and, unlike the traditional CPI, does not have

a statistical bias that increases measured inflation. Using the C-CPI-U to compute COLAs is

projected to reduce Social Security outlays, because the C-CPI-U tends to grow more slowly than

does the CPI-W, which in turn would result in lower Social Security COLAs.

 

Other proposals would link the Social Security COLA to a measure of inflation that is based on

purchasing patterns of the elderly, such as the BLS’s Experimental Consumer Price Index for

Americans Aged 62 and Older (CPI-E). The CPI-E grows faster than the CPI-W, on average,

because a larger portion of spending by the elderly goes toward health care expenditures and

other items whose prices tend to rise more rapidly. As a result, switching to such a measure is

projected to result in larger COLAs and higher Social Security benefits.

 

This report explains how the Social Security COLA is computed under current law and explains

some criticisms of using the CPI-W to compute COLAs. It discusses two alternative measures of

inflation, the C-CPI-U and the CPI-E. The report then explains how using those alternative

measures would affect different groups and how it would affect Social Security’s finances. It

concludes with a review of key recent proposals to change COLA computations and other

possible changes to the COLA.

 

Contents

Social Security COLAs Under Current Law ................................................................................... 1

The CPI-W and Alternative Measures of Inflation .......................................................................... 1

Criticisms of Basing the Social Security COLA on the CPI-W ................................................ 2

General Criticisms ............................................................................................................... 2

The CPI-W Overstates Overall Inflation ............................................................................. 2

The CPI-W May Understate Inflation Experienced by Older People ................................. 3

The Chained CPI-U ................................................................................................................... 3

Revisions to the C-CPI-U Would Complicate COLA Computations .................................. 4

Would a C-CPI-U Overstate Older Americans’ Ability to Substitute Among

Consumer Items? .............................................................................................................. 4

The Experimental CPI for the Elderly ....................................................................................... 5

Effects of Changes to the Social Security COLA: Policy Considerations ....................................... 5

Effect of Changes on Different Groups of Beneficiaries ........................................................... 6

Effect of Changes on Social Security’s Financial Status ........................................................... 9

Proposals to Base the Social Security COLA on the C-CPI-U and Partially Offset the

Resulting Benefit Reductions ..................................................................................................... 11

Offsets Proposed in the President’s 2014 Budget .................................................................... 11

Offsets in Other Proposals ....................................................................................................... 11

Other Options for COLA Changes ................................................................................................. 12

 

Figures

Figure 1. Projected Percentage Change in Retirement Benefits from Basing COLA on a Different Measure of Inflation, by Age ........................... 7

Figure 2. Social Security Benefits as a Proportion of Beneficiary Units’ Total Income, by Age, 2012.................................................. 8

Figure 3. Projected Financial Effects of Changing the Social Security COLA ............................... 9

 

Tables

Table 1. Projected Effect of Changing the COLA on Social Security’s 75-Year Financial Balance .................................................. 10

 

Appendixes

Appendix. Other Federal Provisions Affected by the Social Security COLA Computation.......... 13

 

Contacts

Author Contact Information........................................................................................................... 15

 

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