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  • Social Security's COLA Needs to Be More Accurate

    Any budget agreement should include an improvement of the accuracy of Social Security’s annual cost-of-living allowance (COLA) payments. Press reports say this is now on the table.

    COLAs are designed to protect retirees against inflation eroding the value of their benefits, but the index used to calculate those payments is inaccurate and overstates inflation by about 1 percentage point a year. Back in 1996, a commission led by economist Michael Boskin proved this, and since then, experts have been pushing for a more accurate measure. A more accurate measure would not reduce any retiree’s Social Security payment; it would only improve the accuracy of inflation protection.

    The problem arose when COLAs were first added to Social Security payments back in 1972, because the Bureau of Labor Statistics used only one index. While it has improved since then, that same index (known as the Consumer Price Index for All Urban Consumers, or CPI–U) is still being used today, despite the fact that other more accurate indices are now available.

    In the budget talks, Administration officials and some congressional negotiators are rumored to be discussing using a “chained” version of that index instead. CPI–U is based on a survey of about 85 percent of the population, but it assumes that everyone will buy exactly the same amount of exactly the same items regardless of how prices change. Thus, if the price of apples goes up but the price of oranges drops, the current CPI–U assumes that consumers will still buy the same quantities of each. However, a chained index, C–CPI–U, adjusts quantities—knowing that if the price of apples increases, people will buy fewer apples and more oranges. This results in a more accurate measure.

    The use of a chained CPI has been endorsed by the Simpson–Bowles deficit commission, in legislation introduced by Senator Kay Bailey Hutchison (R–TX), and by the centrist Committee for a Responsible Federal Budget. It is also part of The Heritage Foundation’s Saving the American Dream plan.

    Using a more accurate inflation index would save Social Security about $112 billion over the next 10 years. That is not nearly enough to fix Social Security’s massive deficits, but it is a good start. Doing nothing will result in 22 percent to 25 percent across-the-board benefit cuts for everyone who is receiving benefits.


    Posted in Economics [slideshow_deploy]

    11 Responses to Social Security's COLA Needs to Be More Accurate

    1. e cowan says:

      It's obvious you people don't live on Social Security. I never earned enough to have a private investment program.
      Everything I have to pay for goes up and up and up. My Social Security check hasn't changed in two years.
      When the EPA gets its way, I'll probably wind up having to choose between heat or food, at least during the winter months.
      I know the "greenies" would like me to hurry up and die and stop contributing to global warming. Maybe you and your supporters feel the same way.

    2. Bobbie says:

      How can government EVER BE TRUSTED with the cost of anything! They make sure they're covered from Nancy Pelosi on down to the community organizer collecting their extravagant unearned costs above the private sector they're paid to serve…

      community organizer should amount to unpaid volunteer work or paid by those wanting or needing? one.

    3. MiHi says:

      Dear heritage Foundation,

      The COLA has already been a flawed system, but not in the way you claim. It has actually been screwing people out of what they truly should be getting.

      And now, here you are, calling for an even more unfair set of math to gyp them even worse.

      Go tell your Koch Brothers masters that the Social Security system isn't their property like Wisconsin has become. It will not be as easy to subvert and pervert like a Governor's office.

    4. J.D.Lewis says:

      Yep, that OUR Government for ya, balance the budget on the backs of the generation y hat has made this NATION what it is today. So my thinking is as long as THIS generation is letting what WE built go to hell, they
      may is well let the VETERANS, ELDERLY, DISABLE and those that just tired and defend themselves anymore
      go back to dust as we do not count or deserve to breath the same air.
      This should be a warning to all you young folks, never believe what a politician tells you, as they talk out both sides of there mouth at the same time Remember they have all they need and want and if it can't fit in their pocket, they are not for it.
      Can you tell when a politician is telling a lie? Every time he/she opens their mouth.

    5. e cowan says:

      "Go tell your Koch Brothers masters that the Social Security system isn't their property like Wisconsin has become. It will not be as easy to subvert and pervert like a Governor's office. "

      This ludicrous polemic has nothing to do with the debate about the fairness of the COLA system

    6. Bobbie says:

      Gosh, MiHi, social security and all it's games and fraud is ALWAYS handled by government! The people the pawns, where only government sets the rules and makes the moves. Government benefits themselves the most, then people of tax exempt status and those that are/were obligated to pay in, the least beneficial…

      Don't get the private sector who are accountable, mixed up with government who can hide their accountabilities for years until someone doing their government paid job discovers it. Government proves over and over their ignorance of responsibility, all expenses put on the tax payers. ALL EXPENSES!

    7. Chart says:

      The rise in entitlement spending that you show on your chart is almost entirely due to rising Medicare costs. It shows nothing about the need to curb growth in Social Security spending – because it really shows no growth in real SS spending. It's a bullshit graph. If you were honest you'd recognize that SS does not contribute to the deficit, and that only by getting our medical costs in line with other developed countries can we prevent long term deficit problems.

    8. William C. Brooks says:

      The original rules protected the deposits of contributions into the system by all workers, and then the US government changed the rules and spent our deposits in Social Security. That is what has caused the current problem of entitlement spending, but which is cleverly forgotten by the current government regulators. YOU SPENT OUR MONEY AFTER PROMISING NOT TO DO SO! Now, you want to take away what we have paid for by regular contributions, which, if invested as was originally proposed, wouldn't be causing such a problem. OUR REAL PROBLEM IS Representatives and Senators who have nothing to do but SPEND MORE MONEY. Want to really save money? Give all government employees the same program we, the people have, and that will save a ton of money!!! CURB SPENDING BY GOVERNMENT EMPLOYEES!!! HONNORO GOVERNMENT COMMITTMENTS!!!

    9. John says:

      Does not help the person that is allergic to oranges if the price of oranges goes up or down as opposed to apples. Give people their money and let them decide how to spend it best. If you means test S/S and a new retiree does not need it, they should be able to opt out and get reimbursed what they put in plus interest. My wife has cut back on what she buys and our WalMart bill is up 21% this year. Food up 13% and Gas has been up 100% for three years they are not counted in inflation figures…go figure, oh, I forgot the government has already done that for us!

    10. Bill Paetkau says:

      The "chained CPI" may well be a more realistic methodology for calculating changes in the cost of living, but the problem is that that the way this index is manipulated makes it total bullshit. Food is a major expense for seniors, and meat is about half of that expense. The price of meat is up 100% in the last four years but the CPI is up 3%. The same people who calculate the unemployment rate to be less than 8% are the ones that come up with the CPI and nobody can have any confidence that they're getting either right.

    11. Retired and poor says:

      Why not let all the POLITICIANS live on SOCIAL SECURITY LIKE THE REST OF US TRY TO DO!!!! Let's see how long they last!!!!!!!

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