The government announced on Thursday that nearly 65 million Americans will not receive an increase in Social Security benefits next year.
The reasoning? Consumer prices have been down over the past year.
The following can help break down a couple calculations that measure why Social Security beneficiaries will be without an increase in their 2016 cost-of-living adjustment (COLA):
- The Consumer Price Index (CPI) calculates the average change in prices over time for a “market basket” of goods and services such as food, medical care, housing, and transportation. The CPI reflects spending patterns for a population.
- The Social Security Act provides an automatic increase in Social Security and Supplemental Security Income (SSI) benefits if the Consumer Price Index for Urban Wage Earners and Clerical Earners (CPI-W) shows an increase in inflation.
- To measure a cost of living adjustment, the CPI-W from the third quarter (July, August, and September) of the last year a COLA was made is compared to the third quarter of the current year.
If the CPI-W increases, benefits will go up. If the measurement stays the same or goes down, there will be no uptick in Social Security benefits.
“The Social Security cost-of-living adjustment is supposed to protect benefits from being eroded due to inflation,” says Romina Boccia, deputy director of the Roe Institute for Economic Policy Studies at The Heritage Foundation. “When there is no overall inflation for the basket of goods and services that is used to calculate changes in the cost of living, then there is no COLA for beneficiaries.”
The third quarter of 2014 compared to the third quarter of 2015 shows no increase in CPI-W.
Under current law, there can be no increase for COLA in 2016.
“What this means is that prices haven’t gone up for the entire basket of goods and services, and benefits can buy the same basket of goods this year as last year,” Boccia stated.
Boccia suggests that there is a more accurate index to calculate COLA than the current “outdated measure.”
“In most years, benefits have actually gone up by more than is justified based on the choices individuals make when prices fluctuate,” she told The Daily Signal. “Congress should update the outdated measure used to provide Social Security COLAs, by implementing the more accurate chained CPI.”
The chained Consumer Price Index method accounts for approximately 89 percent of the population, while the CPI-W represents about 28 percent of the population, according to information released Thursday by the Bureau of Labor Statistics.
In addition to the purchasing behavior of wage earners and clerical worker households accounted for in the CPI-W, the chained CPI includes “groups such as professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, and retirees and others not in the labor force,” according to the Bureau of Labor Statistics.
Research by Boccia says that if the chained CPI were to replace the current COLA measure, Social Security benefits would still rise and more accurately reflect the cost of living, contrary to the belief that benefits would be cut.
This will be the third time in 40 years that the COLA will not increase.
