Social Security beneficiaries will not see a cost-of-living-adjustment (COLA) to their benefits this year.
Social Security beneficiaries won’t see a boost in their benefits because there has been no measurable increase in the cost of the basket of goods that is used to calculate changes in the cost of living.
In fact, the index measuring the cost of living for Social Security purposes has fallen compared to last year. In other words, people spent less this year to get the same quantity of products and services they did the prior year.
However, the way the Social Security Administration currently measures the average cost of living is problematic.
In order to decide whether beneficiaries should receive a cost-of-living adjustment to protect their benefits against the value-eroding effects of inflation, the Social Security Administration considers the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It does this by calculating the percent difference between the average price index in the third quarter of the year compared with the average for the third quarter of the prior year.
The problem is that the Social Security Administration uses an index that accounts for the habits of only 32 percent of the population—despite the existence of a newer index that evaluates the purchasing habits of 87 percent of people. The administration uses the outdated index because of status quo bias. It’s been done that way for too long.
You don’t need a statistics degree to recognize that including more individuals in your calculation will yield more accurate results than including fewer will. The nonpartisan Congressional Budget Office stated as well that the chained consumer price index for all urban consumers “provides a more accurate estimate of changes in the cost of living from one month to the next.”
In addition to taking into account price changes experienced by only one-third of Americans, the consumer price index currently used to determine Social Security benefits fails to consider shifts in consumer spending habits as prices change, causing it to overstate the impact of inflation on beneficiaries and leading to excess payments. The chained CPI would correct that flaw.
Congress has thus far failed to instruct the Social Security Administration to implement the more accurate chained CPI. This index would not lead to a COLA this year, either, but it would likely lower COLAs in future years. Congressional neglect is estimated to cost taxpayers $130 billion more over the next decade than necessary to protect benefits against inflation.
This isn’t the only way in which Congress has neglected its oversight responsibilities. Congress has not made any changes to Social Security in 30 years. Meanwhile, Social Security is now in its fifth year of running cash flow deficits, and beneficiaries face automatic 23-percent benefit cuts over the next 20 years.
The program is long overdue for reform, and implementing the chained consumer price index for COLAs is only the first step.
