The CPI-E – A Better Option for Calculating Social Security COLAs

[eridani]

https://www.ncpssm.org/PublicPolicy/SocialSecurity/Documents/ArticleID/1159/The-CPI-E-%E2%80%93-A-Better-Option-for-Calculating-Social-Security-COLAs

President Obama’s 2014 budget proposal includes a plan to change the way Social Security cost-of-living adjustments, or COLAs, are calculated by adopting the “chained” consumer price index (CPI). The National Committee has been vocal in its opposition to the chained CPI because it does not accurately measure the purchasing patterns of our elderly population. We urge the adoption of a CPI for the elderly, or CPI-E, as a more accurate means of calculating Social Security COLAs. An in-depth examination of the CPI-E follows.

The CPI-E uses the same formulas and prices as the CPI-W, but their importance is determined, or weighted, differently. The CPI-E uses expenditure weights for households with individuals age 62 or older. This sample size is 26 percent of the size used for the other BLS indices, so is subject to a greater sampling error than the other indices. This is one reason the CPI-E continues to be classified as “experimental”.

From December 1982 to December 2011, the experimental CPI-E has tended to rise more rapidly than the CPI-W. Using the CPI-E to determine the Social Security COLA would increase the expected average COLA by about 0.2 percentage points per year. In contrast, using the chained CPI would result in COLAs lower than under current law. COLAs using the chained CPI are estimated to reduce expected average COLAs by 0.3 percentage points per year. That means a typical 65 year-old would see a decrease of about $130 in

Social Security benefits using the chained CPI after the change has been effective for three years. At age 95, the same senior would face a 9.2 percent reduction—almost $1,400 per year. The BLS acknowledges the current CPI does not “produce official estimates for the rate of inflation experienced by subgroups of the population, such as the elderly or the poor.” Neither the current CPI-W nor the proposed chained CPI takes into account the spending patterns of America’s seniors. This is why we need an elderly index.

According to the BLS, in order to move to an “official” CPI-E, it would need to conduct additional research including where elderly households are located, where the elderly actually shop, and what mix of products the elderly purchase. The CPI-E has been under review for nearly three decades. It is time for the federal government to provide the resources for BLS to conduct this research and to expand the sample size of individuals age 62 and older, to conclude its analysis, and adopt a more accurate consumer price index for the elderly.