New Ways to Measure Future COLA’s?

measure

The 2018 Cost of Living Adjustment is set using the Bureau of Labor Statistics CPI-W index, however, there are other possibilities for making the adjustment in 2019 and beyond. The BLS has several measures of inflation. The CPI-W is one of the oldest for making COLA’s for federal retirees, Social Security recipients, and others.

The CPI-W measures goods and services purchased by hourly wage earning or clerical workers, which applies to a smaller and smaller percentage of the population. Congress has pushed for an alternative method of computing COLA’s. Below are a few options.

CPI-U

The BLS produces another major index called the Consumer Price Index for All Urban Consumers (CPI-U). This includes expenditures by urban wage earners and clerical workers, professional, managerial, and technical workers, self-employed, short-term workers, unemployed, retirees and others not in the labor force.

This index is most often cited when talks of inflation occur because it reflects a much larger share of the U.S. population than the CPI-W. The CPI-W and CPI-U closely followed each other for the 12 months ending in July. The CPI-U rose 1.7 percent, while the CPI-W rose 1.6 percent.

Moving to this index may be less controversial than others.

CPI-E

The BLS also produces a monthly index focused on the purchasing habits of the elderly (CPI-E). It tends to rise faster than the two mentioned above. It measures the average change in prices over time for a fixed market basket of goods and services for Americans age 62 or older.

The National Active and Retired Federal Employees Association (NARFE) has advocated for the use of the CPI-E. Richard Thissen, president of NARFE, said,

“The fact that we do not use the CPI-E already is shocking. Instead, COLA’s for seniors collecting Social Security and federal civilian or military retirement benefits are based on costs experienced by ‘urban wage earners and clerical workers’, not upon the costs retired individuals experience. And that does not make a lot of sense. Worse yet, it is costing seniors, including federal civilian and military retirees, precious dollars every year. The 2019 COLA was 0.3 percent, and the year before, there was no COLA at all. Yet, over these 2 years, the actual cost of living incurred by seniors increased by 2.7 percent—2.1 percent in 2016 and 0.6 percent in 2015. That is what seniors should have received and that is what this bill would provide them. For the average federal annuitant, that would have meant an increase of approximately $950 per year.”

Currently, the BLS says that the CPI-E has methodological limits which make it unreliable as a substitute for CPI-U or CPI-W. With more funding, the CPI-E could develop into a statistically reliable index.

C-CPI-U

A more controversial measure of inflation, known as the Chained CPI (C-CPI-U), is designed to mathematically “use expenditure data in adjacent time periods to reflect the effect of any substitution that consumers make across item categories in response to changes in relative prices. The new measure is designed to be a closer approximation of ‘cost of living’ index than existing BLS measures”, according to the BLS.

This index gets closer than other indexes by better reflecting how consumers react to changing prices. An example is if the price of pork increases while the price of chicken doesn’t, consumers may shift away from pork to chicken. The C-CPI-U accounts for this type of substitution between CPI item categories.

The BLS has determined that the C-CPI-U tends to show a lower inflation rate than other indexes. For this reason, NARFE has opposed using the C-CPI-U in calculating federal retiree COLA’s because lower COLA’s would reduce the long-term cost of providing federal retiree and Social Security benefits.

Elimination of the Automatic COLA

“Congress enacted the COLA provision as part of the 1972 Social Security Amendments, and automatic annual COLA’s began in 1975. Before that, benefits increased only when Congress enacted specific legislation,” according to the Social Security website.

Prior to automatic COLA’s, Social Security benefits were sporadic. Congress moved to an automatic formula because some saw Social Security increases as too generous and others argued they failed to keep up with inflation.

Losing an automatic COLA would mean retirees would have to go to Congress each year and compete for funding against other government programs.

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