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Social Security Cost of Living Adjustments
- Chris Stein, CFP®
- Apr 9, 2014
- 2 min read
One of the many positives about Social Security is the annual Cost of Living Adjustments (COLA) made to benefit payments. However, prior to 1975, Social Security never included an automatic COLA increase. Any increases to benefit payments required a legislative act of Congress, making actual payment increases few and far between. That all changed in 1973 when Congress passed a law indexing Social Security payments automatically to the Consumer Price Index (CPI) as measured by the Bureau of Labor Statistics.
COLA Adjustments vs CPI Numbers
If you look at things closely though, COLA adjustments paid to Social Security recipients differ from the CPI measure released for a given year. Annual CPI numbers measure the calendar year while the Social Security Administration (SSA) bases their cost of living adjustment from the third quarter of the prior year to the third quarter of the current year.
How the SSA measures COLA adjustments is a point of contention. They base it on a measure called CPI-W which stands for the Consumer Price Index for Urban Wage Earners and Clerical Workers. A very long title that essentially pays a very small benefit! CPI-W is based on the average of all urban or metropolitan workers and seeks to represent the expenses of 32% of the US population. Some argue, (this blog author included) that it greatly underestimates the true inflation experienced by elderly and retired Americans. Although there are eight main “baskets of goods” tracked in the CPI-W, healthcare ─ perhaps the most burdensome expense incurred by retirees ─ represents a mere 6.15% of CPI-W. Sadly, healthcare expenses often consume 20% or more of many elderly Americans’ yearly expenses.
To learn more about CPI-W and how it may be underestimating Northern Colorado retirees’ true inflation experience listen to the audio blog below. In addition, to see the eight major “baskets of goods” the Bureau of Labor Statistics track in CPI-W and their representative percentages click here or visit our Resources Page.
To listen to the audio blog, please use the play button below.
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