Jasmine V. Tucker, National Academy of Social Insurance
The purpose of Social Security’s cost-of-living adjustment (COLA) is to automatically adjust benefits to keep up with rising prices. Experts have long disagreed about how the COLA should be calculated and the rate at which it should grow to fully protect beneficiaries against loss of purchasing power due to inflation.
Some experts say the current COLA does not keep up with the inflation that seniors face because seniors spend more on out-of-pocket health care costs, which generally rise faster than average inflation. Other experts say that the current COLA actually overstates inflation because it does not sufficiently factor in substitution between different categories of goods. A recent survey that asked Americans whether they favor or oppose 14 different policy changes finds that Americans would prefer to increase, rather than reduce, Social Security’s COLA (see table below).
Americans’ Views on
Changing Social Security’s Cost-of-Living Adjustment (COLA)
Increase the COLA
Reduce the COLA
Source: National Academy of Social Insurance Survey, September 2012
The study, Strengthening Social Security: What Do Americans Want?,also finds that Americans’ preferred package of policy changes would more than eliminate Social Security’s financing gap by increasing payroll taxes and paying for modest benefit improvements – including increasing the COLA.
Survey respondents were told that one policy option would base the COLA on a measure of inflation that seniors actually experience. To illustrate, if general inflation from one year to the next is 3%, but inflation experienced by seniors is 3.2%, this COLA for the elderly would increase a $1,000 monthly benefit by $32 instead of by $30. This change would more fully protect seniors against inflation; it would also increase Social Security’s projected financing gap by 13%. Although 26% of survey respondents said they were “not sure” about this policy option, among respondents who did have opinions, those in favor outnumber those opposed by more than 6 to 1 (64% to 10%).
Another proposal presented to survey respondents would base the COLA on a measure of inflation (the chained CPI) that would result in increasing Social Security benefits less than the current COLA does. To illustrate, if inflation from one year to the next is 3%, but a new inflation measure goes up by only 2.7%, the COLA would increase a $1,000 monthly benefit by $27 instead of $30. This change would reduce seniors’ protection against inflation, and the seemingly small difference would add up over time, so the oldest seniors would experience the biggest benefit cuts. This change would reduce Social Security’s projected financing gap by 20%. More than half (55%) of respondents who have an opinion about reducing the COLA are opposed to it, and many are strongly opposed.
For more information about the COLA, see two of NASI’s fact sheets: