By Chris Farrell for Next Avenue
Legislation wending its way through Congress and a recent Government Accountability Office report may lead the way to boosting Social Security benefits for America’s poorest retirees.
The mechanism: adjusting the formula for Social Security’s annual Cost-of-Living Adjustments (COLA) from the current system to one based on how Americans 62 and older really spend their money.
On the legislative front, Rep. John Larson (D-Conn.), chairman of the House Ways and Means Subcommittee on Social Security, along with Sen. Richard Blumenthal (D-Conn.) and Sen. Chris van Hollen (D-Md.) have introduced “Social Security 2100” with such a provision. It has attracted more than 200 Democratic co-sponsors in the House. Sen. Bernie Sanders (I-Vt.) also reintroduced his “Social Security Expansion Act” along with Democratic Senators running for president Cory Booker of New Jersey, Kirsten Gillibrand of New York and Kamala Harris of California plus Sen. Jeff Merkley of (D-Oreg.) Rep. Peter DeFazio (D-Oreg.) is bringing the proposal to the House. The bills haven’t attracted support from Republicans.
A New Type of Social Security Cost-of-Living Adjustment
The main purpose of the bills is to significantly delay or eliminate the date of reckoning for Social Security’s financial shortfall — currently projected for 2034 (with higher taxes). But they also call for switching COLAs to the Consumer Price Index for the Elderly or CPI-E, designed by the U.S. Bureau of Labor Statistics (BLS). The CPI-E would boost Social Security payments without worsening the system’s deficit.
The Government Accountability Office (GAO) just published a fascinating — to me! — report analyzing the current COLA, known as CPI-W (for Consumer Price Index for Urban Wage Earners and Clerical Workers), and comparing it with three potential alternatives, including the CPI-E. (See the table at the end of this article for definitions of the four main indexes.)
There are good reasons to believe the CPI-W systematically shortchanges the elderly. That’s because people 62 and older devote a larger share of their spending to medical care and housing than the rest of the population. The CPI-E gives greater weight to those two items.
In 1982, the BLS began tracking what a CPI-E would mean. And that formula would have produced annual cost-of-living adjustments of about 0.2 percentage points higher a year than the CPI-W, on average.
How the Formula Would Help the Poorest Retirees
Doesn’t sound like much, does it? Well, the impact of switching from to the CPI-E would be small at first. According to the GAO, for someone who retired at 65 in 2003, the annual benefit in 2004 would be about $3 more with the CPI-E. But the benefit boost with a CPI-E grows with time, thanks to the power of compounding. At the end of 30 years, the annual benefit is some $1,300 higher — or more than $100 a month.
The index choice is particularly important to America’s low-to moderate-income retirees. They tend to file earlier to claim Social Security benefits (around age 62) and rely more than other retirees on these checks to pay their bills. The Social Security Administration projects that basing COLAs on the CPI-E would move 238,000 out of poverty by 2050 compared to current practice.
The Chained CPI Formula for Cost-of-Living Adjustments
Although the CPI-E index dominates the current political conversation about Social Security cost of living increases, it wasn’t long ago that the discussion focused on the conservative push for what’s known as the “chained CPI.”
Economists have long suspected that the current CPI-W overstates the rate of inflation and the chained CPI avoids several well-known drawbacks. The chained CPI grows on average about 0.25 percentage points slower than the current COLA formula.
Now, let’s return to that hypothetical 65-year-old retiree in 2003. Compared to the CPI-W adjustment, his annual benefit in 2004 would have been about $12 less with the chained-CPI method. After 30 years, it would be $2,000 less, or $165 less monthly.
You probably don’t know it, but Republican legislators quietly put the chained CPI into the massive 2018 tax law 2018, using it to calculate future inflation adjustments to federal tax brackets and standard deductions. The effect will be to lower the overall cost of that tax law over time.
“We were pretty concerned when (the chained CPI was) put into the tax code,” says Dan Adcock, director of government relations and policy for the National Committee to Preserve Social Security and Medicare. “It’s a way of legitimating the chained-CPI as a way of measuring inflation.”
But the political balance in Congress has since swung, with Democrats now in charge in the House. So for the first time in decades, there’s momentum toward moving to the CPI-E, improving Social Security payouts (especially for the poorest beneficiaries) and shoring up the system’s finances.
It will be interesting to see whether the cost-of-living adjustments get adjusted.
Chris Farrell is senior economics contributor for American Public Media's Marketplace. An award-winning journalist, he is author of the books Purpose and a Paycheck: Finding Meaning, Money and Happiness in the Second Half of Life and Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and The Good Life.
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