The complexity of boosting Social Security COLAs for retirees

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The gap between the cost-of-living adjustment formula for Social Security benefits and one not in use but long favored by advocates for retirees is getting smaller, and the differences between them murkier.

About 64 million beneficiaries will receive the largest COLA in nearly 40 years in January, after inflation boosted the costs captured by the consumer price index for urban wage earners and clerical workers (CPI-W) from the Bureau of Labor Statistics. Critics point out, however, that the effects of a 5.9% increase in benefits are muted by the rise of Medicare Part B premiums and other expenses that are specific to older Americans.

The agency’s experimental index for the elderly (CPI-E) has represented an attempt to more accurately reflect their personal budgets. Indeed, between 1983, when it began, and 2021, the CPI-E rose by an average of 20 basis points more than the other index — which could have meant hundreds of extra dollars per month in benefits over that span for tens of millions of retirees, according to a report this month by the Center for Retirement Research at Boston College.

However, the gap between the real and theoretical index has shrunk significantly in the past two decades, to an average of 5 bps a year between 2002 and 2021, compared to 38 bps between 1983 and 2002. In fact, the report states, using the CPI-E this year would have trimmed the COLA by 90 bps.

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“If the rate of medical care inflation continues to be held in check, as it has for the last two decades, then the argument for using the CPI-E weakens,” the report concluded. “The CPI-E is not a real price index. It simply reweights the data collected for the population as a whole. Thus, if the decision were made to employ an index for the elderly, a new index would be needed with a larger sample of older households that relies on the prices for products they buy at places they shop.”

The lower numbers of doctor visits and hospital stays among the general population during the quarantines of the pandemic made the trend even more pronounced in the past year, according to the report. In addition, older Americans tend to spend less than younger ones on transportation, so the increasing price of gasoline in 2021 didn’t affect them as much. Still, Medicare Part B premiums rose by an extra 373 bps on average each year as compared to the COLAs between 2000 and 2020, according to a different report this summer by the Center.

The divergence between the lower overall growth and the spike in premiums stems in part from the fact that the cost of care for older adults went up during the coronavirus while demand for elective procedures slowed down, according to Patrick Hubbard, a research associate at the Center and the co-author of the report alongside the Center’s director, Alicia Munnel. Medicare derives its premiums from the program’s expenditures rather than the general figures tracking medical inflation across Americans of all ages, he said in an email.

“In the case of the 2022 premium increase, Medicare program officials have indicated a need to build up contingency reserves for the program should costs increase (namely in response to Aduhelm, the new Alzheimer’s drug),” Hubbard said. “So, in this case, the costs haven’t materialized yet, but the desire to plan in advance is affecting the premium costs.”

The complexity explains why, even as retiree advocates such as The Senior Citizens League support legislation tying the COLA to the alternate formula, they agree that the criteria needs a more representative sampling of older Americans, said Mary Johnson a Social Security and Medicare policy analyst for the nonpartisan organization with more than a million members.

Part B premiums come “right out of our Social Security — it lowers the net amount that people receive and it’s a direct cost that older consumers bear,” Johnson said. “So we feel that, in particular, needs to be more fairly represented. That’s one of the fastest-growing costs in retirement and it hasn’t really been included in measuring the index.”

As it stands under the current framework, the CPI-E comes from the sampling of Americans aged 62 or older who are tracked by the overall price index rather than from a separate accounting of the specific group. Therefore, the formula measures a much smaller number that’s not representative of the places older Americans live and shop.

The Center’s findings represent only the latest call for more research and data about a complicated formula that determines how much money financial advisors’ retired clients receive each month in their Social Security checks. Last year, the U.S. Government Accountability Office joined the chorus, concluding that older Americans and certain groups of blue-collar workers may not be accurately depicted in the existing consumer price index.

“BLS has not evaluated the extent to which its existing data are adequate to produce CPIs that reflect what these subpopulations pay, where they shop, and what they purchase,” according to the report. “Officials cite budgetary reasons for not having done this, but there may be cost-efficient methods for evaluating the adequacy of these data.”

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