The CPI: Social Security COLAs

Apr 11, 2013 • Uncategorized • 242 Views    No Comments

Our story starts with Ida Mae Fuller.

At 65, in 1940, Ms. Fuller got the first US monthly Social Security retirement check for $22.54. In 1941, she got $22.54 each month. In 1942, 1943, and 1944 she still got her $22.54. Until 1950, she received $22.54 a month.

You can see that Ida May Fuller had a problem. Each year, her check bought less. In 1949, she needed a monthly check for $38.32 to have the same buying power.

Realizing that beneficiaries’ purchasing power was plunging, in 1950 Congress gave Social Security its first taste of a COLA, a Cost-Of-Living-Adjustment. Since then, at first through special legislation and then automatically based on the CPI, Social Security check amounts have usually risen.

And that takes us to Social Security’s problem. A pay-as-you-go system, current workers pay current beneficiaries. With the baby boomer population bulge, today’s wage earners just won’t provide enough money. Add to that the pressures of a ballooning national debt and you get the need to control the future cost of Social Security.

One way is through COLAs. Just diminish any cost of living increase and the checks can be smaller. Proposed by President Obama, a chained CPI is one way to create these lower COLAs. For the regular CPI, the prices of close to 80,000 goods and services ranging from hockey gloves, to navel organges to hotel rooms are checked regularly. Month to month, exactly the same item is monitored. With a chained CPI, the approach recognizes more realistic buying habits. For example, by recording discount buying, it inputs lower prices. (Please see AARP graph, below.)

Opposing the chained CPI proposal, elderly beneficiaries point out that it does not reflect how they spend. Living in smaller apartments, they do not buy in bulk from a Costco. Unable to drive, they do not search for discounts. Older, they are uneasy with new technology. And finally, unlike a typical market basket, medical spending is a sizable chunk of their spending.

This PBS Paul Solman video provides an excellent explanation.

Just like Mayor Bloomberg has had difficulty downsizing COLAs, so too might President Obama. The Mayor is talking about sugary drinks and the President about Social Security. Both though are talking about what government can give us and what it can take away.

Sources and Resources: For the complete picture, combining an excellent Bloomberg article with the PBS Paul Solman video, you can grasp the whole chained CPI issue. Then you can add this Social Security Administration site for historical facts and COLA stats. For example, during 1980, the COLA was 14.3%. For 2010 it was 0.0%. This year, the COLA will be 1.7%. Finally, for the specific impact of a chained CPI, you might also look at the AARP (American Association of Retired Persons) report that is the source of the following graph:

CPI-E is a market basket based on typical elderly purchases. C-CPI-U is chained CPI. CPI-W is the current CPI market basket used to calculate social security COLAs.

CPI-E is a market basket based on typical elderly purchases. C-CPI-U is chained CPI. CPI-W is the current CPI market basket used to calculate Social Security COLAs.

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