Social Security COLA W or E?

I have previously expressed this opinion, but since I’m not a credible expert, I thought what a real expert has to say might be of interest.

The author of the following is Alicia H. Munnell, director of Boston College’s Center for Retirement Research, in addition to being the Peter F. Drucker professor of management services at the school’s Carroll School of Management and a prolific author of books and articles. Before joining Boston College in 1997, she was a member of the President’s Council of Economic Advisors for two years, and assistant secretary of the Treasury for economic policy from 1993 to 1995. Earlier, she spent 20 years at the Federal Reserve Bank of Boston and earned a Ph.D. from Harvard University.

Do you have an opinion on whether the COLA index should be changed from CPI-W to CPI-Elderly?

The underlying argument for a CPI-E is that older households spend more on medical care than their younger counterparts and the cost of medical care rises faster than other budget items.

In 2007 — the earliest year for which CPI-E weights are publicly available — the elderly spent more than twice as much on medical care relative to their total expenditures as the population as a whole.

What has changed is the rate of medical inflation. Healthcare costs are rising at a much lower rate than in the past. Since this low-inflation component receives twice the weight in the CPI for the elderly as it does in the CPI-W, the CPI-E increased more slowly.

In fact, this year’s COLA based on the experimental CPI-E would have been 4.8% compared with the actual COLA of 5.9%.

To me, shifting to the CPI-E to determine the COLA has never seemed like a productive proposal. First, the difference between the two indexes has declined over time.

More important, the CPI-E is not a real price index. It simply re-weights the data collected for the population as a whole.  As a result, it suffers from several flaws.

In short, fooling around with the index for Social Security’s COLA is not worth the effort. We have bigger fish to fry.

For more, see our brief: What Is the Right Price Index for the Social Security COLA?

3 comments

  1. I suspect the shift in favor of us old timers is due to the voting block power. The kids can’t vote and the poor don’t usually turn out so the pols kept the old timers in mind as someone who needed to be taken care of. Over the years it worked.

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  2. Thanks, but … she misses the practical explanation why this is bogus.

    I know I must have said this elsewhere in a prior post, but, Congress took action way, way back in the 1980’s to control retiree medical expenses. The average annual increase in premiums and out of pocket spend under Medicare has been 3% – 4%, for the past 40 years.

    And, that percentage ignores the massive shift of taxpayer dollars to benefit the elderly in the form of:
    1. Medicare Part D – implemented in 2006, and
    2. Expansion of Medicaid access as a result of Health Reform.

    Only idiots and vote buyers in Congress want to increase benefits in this way – and shift the cost to others – so they can say “ I got this done, vote for me.”

    And, I’m sure I posted in the past that the number of Americans age 65+ has grown dramatically since the 1960’s in number and percentage of population, while concurrently, the percentage living in poverty has declined from 30% to less than 10% (and, if you look beyond income to consider wealth, maybe less).

    Child and adult rates of poverty are much higher and much more persistent.

    So you wanna shift more money from working age adults, and increase the burden on children and future generations?

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