After the Social Security Administration announced in October that it wouldn't be paying a cost-of-living adjustment, or COLA, for the first time in 35 years, Rep. Dan Lipinski got an earful. In letters, E-mails, phone calls, and town-hall meetings, seniors expressed alarm: "We are not sure what the government is measuring here, but they are not measuring what our costs are," Lipinski, an Illinois Democrat, recalled hearing from his constituents. Upon closer inspection of the issue, he came across a technicality in the arithmetic used to determine COLAs that senior advocates have long considered unfair.
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Uncle Sam relies on COLAs to protect the purchasing power of Social Security checks from inflation. The size of Social Security COLAs is calculated using a gauge of inflation known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. When it rises by one tenth of a percent or more from one year to the next, Social Security pays a COLA to reflect this increase. But when it rises by less than 0.05 percent, as it did last year, thanks to plunging energy costs, no COLA is paid.
Amid mounting concern over the absence of a COLA for 2010—and projections that 2011 won't see one either—senior advocates and some members of Congress are putting CPI-W under the microscope, calling it an incomplete index that effectively penalizes older Americans. CPI-W, for instance, specifically excludes cost increases incurred by most retirees and focuses on the changing prices paid by predominantly younger, working Americans. Case in point: healthcare costs. In the CPI-W index, medical spending accounts for just 5.26 percent of monthly expenditures. But a 2009 report by the Henry J. Kaiser Family Foundation found that households with someone on Medicare devoted 14.1 percent of their total spending to healthcare in 2006. To demonstrate how CPI-W effectively penalizes seniors, advocates point to the CPI-E, an experimental index of inflation that the Bureau of Labor Statistics created in the 1980s to measure the rising costs seniors face. Among other differences, 11.07 percent of monthly spending goes to healthcare in CPI-E. If it had been used to calculate Social Security COLAs over the past 26 years, seniors would have received nearly $13,000 in additional benefits, according to a study by the Senior Citizens League. Rep. Eliot Engel, a Democrat from New York, has introduced a bill that would supplant the CPI-W with the CPI-E and mandate minimum annual COLA increases. "Try telling a senior that the cost of living hasn't gone up," Engel says.
But CPI-E is experimental, the Bureau of Labor Statistics notes, and "any conclusions drawn from these data should be treated with caution." And even if CPI-E had been used to calculate COLAs, there still wouldn't have been one for 2010. Meanwhile, Andrew Biggs, a resident scholar at the American Enterprise Institute, argues that while CPI-W fails to appropriately capture seniors' rising healthcare expenses, it includes an additional error that works in their favor. When the price of apples goes up but the price of oranges goes down, he explains, consumers tend to buy fewer apples and more oranges. But because the CPI-W assumes that people buy the same number of apples even as prices rise, the index overstates inflation. "These groups and members of Congress are focusing on one error while ignoring the other one," Biggs says.
Unhappy with the current system but mindful of the CPI-E's shortcomings, Lipinski is cosponsoring a bill directing the Bureau of Labor Statistics to create a new index to accurately measure inflation experienced by seniors. "To me, this is common sense," he says. However, during a time of massive budget deficits, senior advocates may find it difficult to build momentum for legislation that could lead to additional Social Security costs. Still, Barbara Kennelly, president and CEO of the National Committee to Preserve Social Security and Medicare, argues that lawmakers cannot permit rising prices to unfairly chew through seniors' benefits. "We can't let our citizens not be taken care of. Otherwise, that is the beginning of the end for our country," Kennelly says.