What the Social Security COLA Means to Seniors

Despite a narrow brush with a new reduction to Social Security benefits, seniors will not see the proposed move to a more conservative cost-of-living adjustment, or COLA, in 2014.

President Barack Obama’s announcement on Feb. 2 that he was scrapping the earlier proposal preserves the status quo for seniors — for now. The grand budget compromise it was supposed to prompt did not materialize.

The back and forth on COLAs, however, is not resolved. It is deeply linked to larger issues of what we mean when we talk about inflation and expenses for the elderly. Let’s look at the landscape, as it stands, and what hasn’t yet been addressed when it comes to COLAs and seniors’ costs.

Obama originally sought last year to link Social Security’s COLAs to a more conservative measure of inflation. Currently, Social Security is pegged to a consumer price index known as the CPI-W. It’s a broad measure of merchandise costs, and it’s categorized by a demographic that includes urban wage-earners and clerical workers. It measures many goods, sold in many places, over time. The idea is that the COLA given under Social Security changes to keep pace with trends in the costs of these goods under this index.

There is, however, more than one consumer price index. And the president proposed a switch from CPI-W to the “chained” CPI. It’s called “chained” because while it’s linked to shifts in the prices of different kinds of goods, it often refocuses to lower-cost (and perhaps lower-quality) goods to account for the fact that consumers tend to buy cheaper goods in an inflationary environment. One upshot of this difference is that the chained CPI can suggest a lower rate of inflation than the CPI-W.

And that’s no small change.

The Center for Economic and Policy Research put it this way: If we start measuring the growth of inflation by the smaller numbers of the chained CPI, the average worker retiring at age 65 would see a reduction in benefits of about $650 each year by age 75. The reduction grows to roughly $1,130 annually by the time you reach age 85.

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