Keeping Pace with Social Security

Since 1975, Social Security beneficiaries have received a cost-of-living adjustment (COLA) to compensate for inflation every year except 2010 and 2011. The good news is that a 3.6% COLA has been implemented for 2012. However, this “raise” may be reduced slightly by higher Medicare premiums, which are deducted directly from Social Security payments.¹

How the COLA Is Determined

The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures the spending habits of workers who are generally younger than Social Security recipients. A recent study suggests that, while Social Security benefits increased 31% from 2000 to 2011, typical expenses for people aged 65 and older increased by 73%.²

One suggestion to address this disparity is to base the COLA on the CPI for Elderly Consumers (CPI-E), an “experimental” price index that the government has tracked since 1983.³ Although the CPI-E has increased somewhat faster than the CPI-W, the difference is relatively small. A monthly benefit of $1,000 in 2001 would have increased to about $1,268 in 2011 based on the CPI-W and $1,280 based on the CPI-E.⁴

Considering Social Security’s fiscal problems, a more likely change (proposed by two congressional commissions) is to lower benefit adjustments by tying the COLA to the slower-moving Chained CPI for All Urban Consumers (C-CPI-U), which attempts to track changes in spending patterns as consumers respond to price changes.⁵ If the $1,000 monthly benefit in 2001 had been based on the C-CPI-U, it would have increased to only $1,238 in 2011.⁶

Regardless of the index used, current and near-retirees are unlikely to see major changes to their basic benefits. It’s clear that Social Security should not be given too much weight in funding a comfortable retirement.

1) Social Security Administration, 2011
2–3) The Senior Citizens League, 2011
4, 6) Haver Analytics, 2011
5) Center for Retirement Research, 2011

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