By Rachel Goldberg
No matter what we call it, we all monitor our cost of living, from rent to transportation, from health care to home heating oil. While some prices may go down, the trend is generally up. If we are lucky, our jobs have built-in cost-of-living adjustments, or regular raises to maintain our buying power. We all hope to be doing at least as well this year as last, and that means, one way or another, we want our income adjusted for inflation in the cost of living.
This is particularly important for the elderly, one third of whom rely almost exclusively on Social Security for their income. Social Security replaces a portion of pre-retirement earnings, so we already know that retiring solely or primarily on these benefits can mean a drop not only in income but in standard of living.
Someone making an average annual middle income salary of $46,000 would receive a yearly Social Security benefit of about $18,000, or about 40 percent of former income. For a high-wage worker with average lifetime wages of $112,000, the annual benefit is around $29,000, replacing 26 percent of prior income. In order to prevent further erosion in the buying power and standard of living for people who heavily rely on Social Security Congress instituted automatic cost of living adjustments, or COLA in 1973.
But how the COLA is determined is imperfect and controversial. You see, the U.S. Department of Labor uses the Consumer Price Index (CPI), which uses several different ways to measure the cost of living. Are consumers paying more for the same items this year as last? Which expenses are rising the most? The least? All those questions and answers are built into the different indices developed at the Department of Labor, and how they are weighted matters a great deal. Currently, Social Security, Veterans benefits and most other federal programs for low income people and the elderly that rely on the CPI use what’s called the CPI-W. This is a catchy little nickname for the CPI for “Urban Wage Earners and Clerical Workers.” There would be no problem if spending by retired older adults and people collecting Social Security Disability Insurance (SSI) payments, along with those very low-income people collecting SSI and veterans collecting VA benefits, matched those of urban and clerical workers. But they don’t.
The urban wage earners and clerical workers said to be represented by the CPI-W make up only about 23 percent of the U.S. population. Social Security beneficiaries are generally not among them. Urban wage earners spend more on things like daily transportation and work clothes. Most retirees have lower incomes and spend a higher percentage on things like health care, housing and utilities. So, the CPI-W inaccurately estimates and usually underestimates the cost of living for older people, and how it varies from year to year.
The Missing COLA
Last year, while health care costs (including Medicare deductibles) continued to rise for older adults, there was no Social Security COLA increase. For 2017, it will be .3 percent, boosting the average monthly payment by about $4. Thus, because the COLA formula is inappropriate for older people, the buying power of someone relying on Social Security can decline over time. This is particularly troubling because many other retirement accounts, like 401ks, can eventually run out of funds. So, the older you are, the more you rely on Social Security, and the actual value of your benefit has declined based on how the COLA is measured.
Unfortunately, over the last decade the only serious discussion of changing the Social Security COLA calculation has revolved around producing a lower percentage adjustment and another less accurate measurement of what Social Security recipients actually spend. Advocates for the elderly have so far successfully fought this so-called “chained CPI” formula. But future success is not guaranteed, because reducing COLAs not only erodes benefits, it also saves the government money. So, pressure will continue to go this route, despite its assumptions about the flexibility of an urban consumer’s spending that don’t apply to retirees who must pay for non-negotiable items like housing and medical care, rather than clothing, leisure and even transportation.
So, the bipartisan but misguided attempts to make the COLA formulation worse have failed.
But there is another option. Since 1987, the Labor Department has calculated an “experimental” CPI based on the spending patterns of older adults. It’s called CPI-E, for Consumer Price Index for the Elderly-Experimental. For years, advocates have supported this approach without success. But the tide may be turning. There are currently several bills in the U.S. House of Representatives that would switch Social Security (and other programs for low-income and/or elderly people) to the CPI-E or to another measure focused on actual cost patterns. One bill would simply tie the COLA automatically to measures of medical inflation, which is one of the main drivers in the actual cost of living for elderly and disabled people.
Linking Solvency and Adequacy
A decade ago, the talk was all about how we could cut benefits to keep Social Security “solvent,” from running out of funds. But, in the last few years politicians have begun to understand that solvency and adequacy of benefits are inextricably linked—and that making the program solvent by cutting benefits and thereby impoverishing our elders would be no victory. So, as we tackle long-term solvency and adequacy together, tying benefits to beneficiaries’ actual cost of living is just one piece. There are other ways to improve the adequacy of Social Security benefits that are becoming integral parts of conversations on solvency, and that is as it should be.
Had we been using the CPI-E since its conception nearly 30 years ago, an individual collecting benefits the entire time, perhaps an elderly single person or widow with few other resources, would be receiving about 15 percent more each month. For low or moderate-income retirees, that could mean the difference between just making rent and paying rent while also buying groceries and prescription drugs and while keeping up with utility bills.
Because of their complexity, these issues don’t lend themselves to quick sound bites. But the COLA matters. It’s important to make sure Social Security benefits maintain their value for the people who have earned them through a lifetime of hard work and economic contributions.
Rachel Goldberg, who holds a doctorate in political science, is the B’nai B’rith director of aging policy.
We are sad to say this is Rachel Goldberg’s last column for B’nai B’rith Magazine. She has contributed to the magazine for 13 years as the B’nai B’rith International director of aging policy but is leaving for a wonderful opportunity at AARP. Her must-read columns have offered vital insights into all manner of aging issues. We wish her well. This column will continue. Please watch this space in your spring issue.