Why Social Security Calculations Matter

Oct 27, 2020 / Amanda Chase, Horsesmouth Assistant Editor

Social Security is the cornerstone of retirement savings for 20% of Americans, thus the cost of living adjustment determined yearly by the Social Security Administration has an impact on retirees. The COLA is calculated using the CPI-W, a consumer price index reflecting increases for urban wage earners and clerical workers that is based on a fixed market basket of goods and services. COLAs have surpassed 2% only twice since 2010.

The problem with the measurement, according to Social Security advocacy groups, is it doesn’t reflect reality for seniors, who spend twice as much on health care as the average population, according to the National Committee to Preserve Social Security and Medicare. Those 75 and older spend three times as much. The CPI-E (E for elderly) uses the same formulas and prices as the CPI-W but puts more weight on expenditures typical of those 62 and older. COLAs using this index would be 0.2 percentage points higher on average, the Social Security Office of Chief Actuary reported in 2011.

A third way to adjust COLAs was brought up by the Obama administration in a budget proposal in 2013 and then dropped due to Democratic backlash, but has again reappeared, this time in a spending bill by Republicans: the so-called chained CPI, or C-CPI-U. This, according to the Chief Actuary’s 2011 estimate, would decrease the annual COLA, on average, by 0.3 percentage points. The chained CPI is a version of the CPI-U, which measures all urban consumers and is used for the tax code. C-CPI-U takes into account how consumers will switch to less expensive brands or products in case of a price increase.

The fact remains that all these measurements especially impact the elderly and most likely nothing will happen before the election. Dan Adcock, director of government affairs and policy for the NCPSSM, told ThinkAdvisor that the 3% increase proposed by House Democrats last week would need a budget resolution and 60 votes in the Senate, which is unlikely to happen.

You can find the full ThinkAdvisor article here.


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